2 crucial accounting assignments

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M4 Assignment 2 Submission

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Instructions

Assignment 2: The Weighted Average Cost of Capital

By the due date assigned , complete the following assignment:

Coogly Company is attempting to identify its weighted average cost of capital for the coming year and has hired you to answer some questions they have about the process. They have asked you to present this information in a PowerPoint presentation to the company’s management team. The company would like for you to keep your presentation to approximately 10 slides and use the notes section in PowerPoint to clarify your point. Your presentation should address the following questions and offer a final recommendation to Coogly. Make sure you support your answers and clearly explain the advantages and disadvantages of utilizing the weighted average cost of capital methodology. Include at least one graph or chart in your presentation.

Company Information

The capital structure for the firm will be maintained and is now 10% preferred stock, 30% debt, and 60% new common stock. No retained earnings are available. The marginal tax rate for the firm is 40%.

Coogly has outstanding preferred stock That pays a dividend of $4 per share and sells for $82 per share, with a floatation cost of $6 per share. What is the component cost for Coogly’s preferred stock? What are the advantages and disadvantages of using preferred stock in the capital structure?

If the company issues new common stock, it will sell for $50 per share with a floatation cost of $9 per share. The last dividend paid was $3.80 and this dividend is expected to grow at a rate of 7% for the foreseeable future. What is the cost of new equity to the firm? What are the advantages and disadvantages of issuing new equity in the capital structure?

The company will use new bonds for any capital project, according to the capital structure. These bonds will have a market and par value of $1000, with a coupon rate of 6% and a floatation cost of 7%. The bonds will mature in 20 years and no other debt will be used for any new investments. What is the cost of new debt? What are the advantages and disadvantages of issuing new debt in the capital structure?

Given the component costs identified above and the capital structure for the firm, what is the weighted average cost of capital for Coogly? What are the advantages and disadvantages of using this method in the capital budgeting process?

Submit your assignment to the Submissions Area through the end of the module.

Assignment 2 Grading Criteria

Maximum Points

Correctly calculated the cost of issuing preferred stock and explained the advantages and disadvantages of using preferred stock in the capital structure.

20

Correctly calculated the cost of issuing new equity and explained the advantages and disadvantages of issuing new equity in the capital structure.

20

Correctly calculated the cost of new debt and explained the advantages and disadvantages of issuing new debt in the capital structure.

20

Correctly calculated the weighted average cost of capital for the firm and explained the advantages and disadvantages of the using this method in the capital budgeting process.

20

Prepared an informative and accurate PowerPoint presentation which summarized the relevant and important aspects of the findings. At least one chart or graph was included and the notes section was used to clarify the talking points.

10

Written in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation.

10

Total:

100

Due Date

Assignment 1: LASA # 2—Capital Budgeting Techniques

As a financial consultant, you have contracted with Wheel Industries to evaluate their procedures involving the evaluation of long term investment opportunities. You have agreed to provide a detailed report illustrating the use of several techniques for evaluating capital projects including the weighted average cost of capital to the firm, the anticipated cash flows for the projects, and the methods used for project selection. In addition, you have been asked to evaluate two projects, incorporating risk into the calculations.

You have also agreed to provide an 8-10 page report, in good form, with detailed explanation of your methodology, findings, and recommendations.

Company Information

Wheel Industries is considering a three-year expansion project, Project A. The project requires an initial investment of $1.5 million. The project will use the straight-line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million per year before tax and has additional annual costs of $600,000. The Marginal Tax rate is 35%.

Required:

  1. Wheel has just paid a dividend of $2.50 per share. The dividends are expected to grow at a constant rate of six percent per year forever. If the stock is currently selling for $50 per share with a 10% flotation cost, what is the cost of new equity for the firm? What are the advantages and disadvantages of using this type of financing for the firm?
  2. The firm is considering using debt in its capital structure. If the market rate of 5% is appropriate for debt of this kind, what is the after tax cost of debt for the company? What are the advantages and disadvantages of using this type of financing for the firm?
  3. The firm has decided on a capital structure consisting of 30% debt and 70% new common stock. Calculate the WACC and explain how it is used in the capital budgeting process.
  4. Calculate the after tax cash flows for the project for each year. Explain the methods used in your calculations.
  5. If the discount rate were 6 percent calculate the NPV of the project. Is this an economically acceptable project to undertake? Why or why not?
  6. Now calculate the IRR for the project. Is this an acceptable project? Why or why not? Is there a conflict between your answer to part C? Explain why or why not?

Wheel has two other possible investment opportunities, which are mutually exclusive, and independent of Investment A above. Both investments will cost $120,000 and have a life of 6 years. The after tax cash flows are expected to be the same over the six year life for both projects, and the probabilities for each year’s after tax cash flow is given in the table below.

Investment B

Investment C

Probability

After Tax
Cash Flow

Probability

After Tax
Cash Flow

0.25

$20,000

0.30

$22,000

0.50

32,000

0.50

40,000

0.25

40,000

0.20

50,000

  1. What is the expected value of each project’s annual after tax cash flow? Justify your answers and identify any conflicts between the IRR and the NPV and explain why these conflicts may occur.
  2. Assuming that the appropriate discount rate for projects of this risk level is 8%, what is the risk-adjusted NPV for each project? Which project, if either, should be selected? Justify your conclusions.

Turn in your completed work to the Submissions Area by the due date assigned.

Assignment 1 Grading Criteria Maximum Points
Correctly calculated the cost of new equity and explained the calculations, as well as the advantages and disadvantages of using this type of financing for the firm. (CO4)

20

Correctly calculated the cost of new debt and explained the calculations, as well as the advantages and disadvantages of using this type of financing for the firm. (CO4)

20

Correctly calculated the weighted average cost of capital and explained how and why it is used in the capital budgeting process. (CO4)

20

Correctly calculated the annual cash flows for the projects and explained the methods used in the calculations. (CO1)

44

Evaluated the projects using the NPV method and came to the correct conclusions based on the decision rules for the NPV. (CO2)

44

Evaluated the projects using the IRR method and came to the correct conclusion based on the decision rules for the IRR. Identified any conflicts between the IRR and the NPV and explained why these conflicts may occur. (CO 3)

44

Correctly introduced risk into the evaluation by using the expected values as the cash flows and evaluated these cash flows using risk adjusted discounted rates. (CO 5)

44

Written in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation.

64

Total:

300

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