ANSWER ALL QUESTIONS

1a- Reading the research article by Al-Mutuairi and Saeid (2018), answer the following questions:

1-Who is the most important source and decision maker for capital budgeting decisions in Kuwaiti companies?

2- Which are the major capital budgeting techniques employed by Kuwaiti companies? Which is the most popular?

3-What are the various considerations in the selection / choice of capital budgeting techniques?

4-What are the top three obstacles towards the use of capital budgeting techniques?

5-Identify the top three non-financial factors that affect capital budgeting

(20 marks)

1b. Gulf Oil is considering two mutually exclusive projects - Project A and Project B. Each requires an initial investment of $500,000. John Shell, president of the company, has set a maximum payback period of 3 years and the minimum cost of capital at 14%. The after-tax cash inflows associated with each project are as follows:

Year

Cash Inflows in $

Project A

Project B

1

100,000

400,000

2

200,000

300,000

3

300,000

200,000

4

400,000

100,000

5

200,000

200,000

1-Determine the Payback Period (PBP), Net Present Value (NPV) and Profitability Index (PI) of each project.

2- Which project should the company invest in? Explain why.

(25 marks)

2a. Reading the research article by Adelman & Cross (2005), answer the following questions:

(Adelman, S. W., & Cross, M. L. (2005). CALCULATING THE WEIGHTED AVERAGE COST OF CAPITAL FOR A MUTUAL INSURANCE COMPANY. Corporate Finance Review, 9(4), 19-28. Retrieved from https://search.proquest.com/docview/198758745?accountid=51112)

1-What are the two approaches for estimating cost of equity capital? Identify one

2-advantage and one disadvantage of the CAPM approach.

(10 marks)

2b -Tesco is evaluating its cost of capital under alternative financing arrangements. In consultation with investment bankers, Tesco expects to be able to issue new debt at par with a coupon rate of 8.5% and to issue new preferred stock with a $1.5 per share dividend at $20 a share.

The common stock of Tesco has a beta of 1.1. The risk-free rate on government securities is 3% and the market return from similar investments is 6%. Tesco's marginal tax rate is 35%.

If Tesco raises capital using 35% debt, 5% preferred stock, and 60% common stock, what is Tesco's cost of capital?

(20 marks)

3-Swift Manufacturing must choose between two projects. The annual rate of return and the related probabilities given in the following table summarize the firm's analysis to this point.

a. For each project, compute - the expected value of return and standard deviation of the returns.

b. Which project would you consider less risky? Why?

(15 marks)

Project 225

Project 522

Rate of Return

Probability

Rate of Return

Probability

-10%

.01

10%

.05

10%

.04

15%

.10

20%

.05

20%

.10

30%

.10

25%

.15

40%

.15

30%

.20

45%

.30

35%

.15

50%

.15

40%

.10

60%

.10

45%

.10

70%

.05

50%

.05

80%

.04