TRIDENT FIN301 Module 4 Case Latest 2019 January Question # 00597688 Course Code : Fin301 Subject: Business Due on: 02/04/2019 Posted On: 02/04/2019 11:13 AM Tutorials: 1 Rating: 4.7/5
FIN301 Principles
of Finance
Module 4 Case
CAPITAL BUDGETING AND CAPITAL STRUCTURE
Questions 1 and 2 for this assignment are computational in
nature and require the use of Microsoft Excel. Questions 3 and 4 are conceptual
in nature and do not require computations. Make sure to thoroughly review the
required background readings and work through both the concepts and the
computational examples. The videos on computing NPV and IRR using Excel along
with the sample spreadsheet should also help. If you are unable to figure out
how to make the computations in Excel, then you can get partial credit by
computing the answers using a calculator and thoroughly explaining your steps.
For conceptual questions, make sure to thoroughly explain the reasoning for
your answers and to use references from the required background readings.
Case Assignment
Submit your answers to the following questions in a Word
document, and also submit an Excel file with your computations for Questions 1
and 2:
- The table below gives the initial investment (the
negative numbers at “Year 0”) for two projects. Compute the payback
period, the NPV, and the IRR using Excel. Then rank the two projects based
on each of these three criteria, and discuss which projects should be funded
based on your computations.
|
Firm Cost of Capital: |
11% |
|
|
Year |
Project A |
Project B |
|
0 |
-100,000 |
-150,000 |
|
1 |
25,000 |
30,000 |
|
2 |
25,000 |
30,000 |
|
3 |
25,000 |
90,000 |
|
4 |
25,000 |
20,000 |
|
5 |
25,000 |
20,000 |
|
6 |
25,000 |
20,000 |
- The ACME Umbrella Company is deciding between two different
umbrella factories. Both factories will cost $500,000 to get started.
However, the cash flows for each factory will depend on whether the next
five years are rainier than average or sunnier than average. Factory A
will have cash flows of $130,000 per year for the next five years if the
weather is sunnier than average. But if it is rainier than average the
cash flows will be $150,000 per year for the next five years. Factory B
will have cash flows of $100,000 per year for the next five years if it is
sunnier than average, but if it is rainier than average it will have cash
flows of $200,000 per year. ACME has a cost of capital of 9%. Based on
this information, calculate the following: - Calculate the NPV for both factories
and for both scenarios (rainy versus sunny). What is the range of NPV for
each factory based on your scenario analysis? - Based on your answer to a) above, do
you think ACME should use the same discount rate of 9% for each factory?
Or should they use a risk-adjusted discount rate (RADR)? If so, which
factory should have a higher RADR? Explain your answer with references to
the background readings. - Your neighbor Freewheeling Franklin has a very
successful new internet-based technology company. While his company has
great cash flow, you see Mr. Franklin has a collection of five expensive
sports cars in his newly built garage. You also see him throwing some
extravagant parties every weekend where he serves expensive champagne.
Based on the required background readings such as Ross, et al. (2013).,
explain how you would handle the following situations: - Mr. Franklin asks you for a loan to
help expand his business and offers you an interest rate considerably
higher than you would get from leaving your money in the bank. As a
lender, what measures might you take to make sure you get your money back
and Mr. Franklin won’t waste the money? - Mr. Franklin asks you to buy
one-third of his company, and wants to use the money from selling this
portion of the company to expand his business. As a shareholder, what
steps might you take to make sure he spends his profits and the
investment money you gave him wisely? - Suppose you own a new business and after a few rough
years you now are making a solid profit of $150,000 per year and have
built up some savings as well. While your business is successful, you
realize that in order to expand and remain competitive you are going to
have to raise a lot of money to invest in some new machinery and new
stores. You have to decide between using your savings to finance your
expansions and machinery upgrades, taking out a bank loan, or selling a
portion of your equity to new investors. Explain the pros and cons of each
of these three options in this situation, and make references to the
required background readings such as Ross, et al. (2013).
Assignment Expectations
- Answer the assignment questions directly.
- Stay focused on the precise assignment questions. Do
not go off on tangents or devote a lot of space to summarizing general
background materials. - For computational problems, make sure to show your
work and explain your steps. - For short answer/short essay questions, make sure to
reference your sources of information with both a bibliography and in-text
citations. See the Student Guide to Writing a High-Quality Academic Paper,
including pages 11-14 on in-text citations. Another resource is the
“Writing Style Guide,” which is found under “My Resources” in the TLC
Portal.
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