Compute the net present value, profitability index, and internal rate of return

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Compute the net present value, profitability index, and internal rate of return for a given company, Compute a company’s WACC using given percentages, Calculate the cost of capital of a stock, etc

Instructions

This assignment will allow you to demonstrate the following objectives:

·Compute the net present value, profitability index, and internal rate of return for a given company.

·Predict the best choice for a company based on analysis of financial data.

·Compute a company’s WACC using given percentages.

·Calculate the cost of capital of a stock.

·Compute the after-tax cost of capital for bonds.

1. The Turnip Company plans to issue preferred stock. Currently, the company’s stock sells for $110. Once new stock is issued, the Turnip Company would receive only $90. The dividend rate is 8%, and the par value of the stock is $100. Compute the cost of capital of the stock to your firm. Show all work.

2. The Maximus Corporation is considering a new investment, which would be financed from debt. Maximus could sell new $1,000 par value bonds at a new price of $920. The bonds would mature in 13 years, and the coupon interest rate is 10%. Compute the after-tax cost of capital to Maximus for bonds, assuming a 34% tax rate. Show work.

3. Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 10%.

Project 1

Project 2

Initial investment

$(465,000)

$(700,000)

Cash inflow Year 1

$510,000

$850,000

Compute the following for each project:

·NPV (net present value)

·PI (profitability index)

·IRR (internal rate of return)

Based on your analysis, answer the following questions :

·Which is the best choice? Why?

·Which project should be selected and why? If the projects had the same IRR amounts but different NPV totals, then how would you know which project to select? Explain.

·What would happen if both projects had negative NPV totals? Which project would you choose? What do negative NPVs indicate? Explain.

·Should we also use the payback method to assist us in project selection? Why or why not? Explain.

4. The capital structure for Magellan Corporation is shown below. Currently, flotation costs are 13% of market value for a new bond issue and $3 per share for preferred stock. The dividends for common stock were $2.50 last year and have an estimated annual growth rate of 6%. Market prices are $1,020 for bonds, $20 for preferred stock, and $30 for common stock. Assume a 34% tax rate.

Financing Type

% of Future

Financing

Bonds (8%, $1k par, 16 year maturity)

36%

Common equity

45%

Preferred stock (5k shares outstanding, $50 par, $1.50 dividend)

19%

Total %

100%

Compute the company’s WACC. Is this WACC considered reasonable given the assumptions and other relevant information? Explain.

Sample Solution

Under the NPV approach, the present value can be calculated by discounting a project’s future cash flow at predefined rates known as cut off rates. However, under the IRR approach, cash flow is discounted at suitable rates using a trial and error method that equates to a present value. The present value is calculated to an amount equal to the investment made. If IRR is the preferred method, the discount rate is often not predetermined as would be the case with NPV.NPV takes cognizance of the value of capital cost or the Market rate of Interest. It obtains the amount that should be invested in a project in order to recover projected earnings at current market rates from the amount invested.

provement can or should be managed within schools or how to effectively measure improvements in health and wellbeing for children and young people.

Ensuring children and young people achieve their full potential and improvements being made in their health and wellbeing should be top of the agenda in Scotland. Indeed, the Additional Support for Learning Act (Scottish Government, 2009), defines the need to ensure that nurturing students emotional needs are a statutory requirement. Scottish legislation reflects a recognition of the need to improve wellbeing for all our children and young people. This need is emphasised in policies such as Curriculum for Excellence (2004), the Children and Young People (Scotland) Act 2014 and Getting It Right for Every Child: National Practice Model (Scottish Government 2012). Getting It Right for Every Child: National Practice Model (Scottish Government, 2012) also links in with the United Nations Convention on the Rights of the Child (UNCRC) within the document and highlights the importance of nurture. It also empathises the significance of positive parental and family engagement. However, consideration must be given to staff capability and capacity and equal distribution of resources and opportunities in order to achieve equity and equality for all. Scottish Government policies and legislation for the benefit of children continue to affirm that ‘closing the gap in attainment, achievement and wellbeing between children and young people in our most and least deprived areas is the key challenge for Scottish education’. (HGIOS4 2015, p.5). The Child Poverty Strategy for Scotland: Our Approach 2014-17 (Scottish Government, 2014) also underlines the importance of addressing issues from deprivation figures and employment statistics. All these policies highlight the importance of nurture within the health and wellbeing agenda but give no solution in addressing the issues. It is therefore essential for education authorities and Headteachers to take local context into account when tackling them.

Within my local authority level, policy adoption is driven by poor attendance rates, high levels of deprivation and poverty and reported low rates of emotional wellbeing and life satisfaction. Whilst there has been a local authority focus on improving outcomes for learners across literacy and numeracy, the health and wellbeing of our children and young people also needs to be considered. Only focussing on improvement in literacy and numeracy levels in a bid to compete with local and national league tables may have an unintended negative impact on the health and wellbeing of pupils arising from such pressures. Within Applying Nurture as a Whole School Approach (Edu

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