Posted: September 18th, 2017

Capital Structure Finance/ bond valuation

Calculate the correct answer in all problems
USE NPV, Rate, and IRR Functions as appropriate in Problems 4b, 4d. 4e, 5, and 8
Explain in words what you do to make each calculation
Explain in words what the answers mean
Points
1
10

2-A 3

2-B
7

3 A company, West Berwick Enterprises, has a capital structure as follows:
Total Capital $1,000,000
Debt $400,000
Preferred Stock $100,000
Common Equity $500,000

15

4

Net Cash Flow
Year Project A Project B
0 -$4,000,000 -$5,000,000
1 $800,000 $1,900,000
2 $1,000,000 $1,700,000
3 $1,200,000 $1,400,000
4 $1,400,000 $900,000
5 $1,600,000 $300,000

4-A Calculate the payback period for each project.
Project A Project B
6

4-B Calculate the net present value for each project.
Project A Project B
6

4-C Which project do you think will be approved, if only one project can be approved? Why?
Project A Project B
3

4-D What if the required rate of return was 10%?
Project A Project B
6

4-E What is the Internal rate of return?
Project A Project B 6

4-F Which is the best to use for deciding: Payback, NPV or IRR? Why? 8

5

6

6-A
6

6-B
6

7

6

8

6

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