Assignment: Corporate Finance Paper
Length: 5 to 7 Pages.
Topics Covered Include:
o Weighted Average Cost of Capital
o Valuation of Equity using the Capital Asset Pricing Model
o Book Value of Debt
o Capital Structure
o Capital Budgeting Technique of Net Present Value
o Time Value of Money (Discounting)
BACKGROUND OF THE PROBLEM:
The market situation: The risk-free rate is 5% and the market risk premium is 8%. The firm's corporate tax rate is 35%. The firm has a beta of 1.10.
Common Stock is listed on the balance sheet of this company at $25 million. The Total Retained Earnings (meaning RE + Additions to Retained Earnings) is listed on the balance sheet as $50 million.
Long-term Debt consists of one outstanding bond issue with a face value of $75 million dollars, an 8 percent coupon rate and it sells for 93 percent of par.
A proposed project has expected cash inflows of year 1, $30,000; year 2, $40,000; year 3, $30,000 and year 4, $40,000. There is no residual value at the end of year 4.
Answer the following in 5-7 pages
o What is the cost of equity using the CAPM?
o What is the cost of debt using Book Valuation?
o What is the capital structure of the organization using book values?
o What is the weighted Average Cost of Capital (WACC)?
o What is the Net Present Value of the proposed Project?
o Should the company purchase this project using your computed data? Explain.
o What literature article supports Net Present Value over IRR or Payback?
Format your assignment according to the following formatting requirements:
o The answer should be typed, using Times New Roman font (size 12), double spaced, with one-inch margins on all sides.
o The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
o Also include a reference page. The Citations and references must follow APA format. The reference page is not included in the required page length.