CAPITAL BUDGETING CASE STUDY ANALYSIS

ACME Inc. is a multinational conglomerate corporation providing a wide range of goods and services to its customers. As part of its budgeting process for the next year, it has several projects under consideration so it must decide which projects should receive capital budgeting investment funds for this year. As part of the financial analysis department, you have been given several projects to evaluate. However, before you can determine the appropriate valuations of these projects, you need to determine the weighted average cost of capital for the firm since it is used as a threshold of acceptability for projects. Remember that management has a preference in using the market values of the firms capital structure and believes its current structure (target weight/market weight) is optimal.

Market Values of Capital

1.The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 10 percent semiannual coupon and are currently selling for$874.78.

2.You also have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00.

3.The company has 5 million shares of common stock outstanding with a current price of $17.00 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D0) was $.65.

4.The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is13 percent. Your stocks beta is 1.22.

5.Your firm only uses bonds for long-term financing.

6.Your firms federal + state marginal tax rate is 40%. (Ignore any carry forward implications)

Depreciation Schedule: Modified Accelerated Cost Recovery System (MACRS)Ownership Year 5-Year Investment Class Depreciation Schedule:

Year 1: 20%

Year 2: 32%

Year 3: 19%

Year 4: 12%

Year 511%

Year 6: 6%

Total = 100%

Each Student will be provided two (2) projects which they will evaluate. Students are expected to report the results of their analysis in Week 6 in a PowerPoint slides presentation. Groups will also submit spreadsheet work for all sections. Calculations for all parts will be graded in the spreadsheet score in Week 6.

Capital Budgeting Assignment Part 1 Section 1

(10%of total grade)

Find the costs of the individual capital components:

* long-term debt (before tax and aftertax)

* preferred stock

* average cost of retained earnings (avg. of Capital Asset Pricing Model & Gordon Growth Model/Constant Growth Model)

Section 2

(15% of total grade)

Determine the target percentages for the optimal capital structure, and then compute the WACC. Carry weights to a minimum of four decimal places, but rounding in calculations is not necessary. (i.e. 0.2973 or 29.73%)

Section 3, Part 1

(30% of total grade)

(1) of the project assignment and create a valuation spreadsheet for the project provided by your instructor. You should use your Use the spreadsheet template provided to structure your valuation analysis. Evaluate each project according to the following valuation methods:

* Net Present Value of Discounted CashFlow(use WACC number for discount rate)

* Internal Rate of Return

* Payback Period

* ProfitabilityIndex(use WACC number for discount rate)

Project A: This project requires an initial investment of $2,000,000 in equipment, which will cost an additional $130,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase networking capital by $250,000. The project will last 6 years at which time the market value for the equipment will be $150,000. The project will project a product with a sales price of $20.00 per unit and the variable cost per unit will be $10.00. The fixed costs would be $200,000 per year. Because this project is very close to current products sold by the business, management has expressed some favoritism towards this project and has allowed for a reduced rate of return of 2 percentage points below its current WACC as the valuation hurdle it must meet or surpass. Years 2014, 2015, 2016, 2017, 2018, & 2019. Forecasted Units Sold 70,000, 100,000, 65,000, 70,000, 65,000, & 55,000

Project B: This project requires an initial investment of $2,000,000 in equipment, which will cost an additional $100,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase networking capital by $70,000. The project will last 6 years at which time the market value for the equipment will be $50,000. The project will project a product with a sales price of $40.00 per unit and the variable cost per unit will be $15.00. The fixed costs would be $150,000 per year. Because this project is not close to current products sold by the business, management wants to adjust the risk profile of this analysis by imposing a 2 percentage point increase over the firms WACC. Years 2014, 2015, 2016, 2017, 2018, & 2019. Forecasted Units Sold 50,000, 60,000, 70,000, 80,000, 90,000, & 80,000.

Please put it in excel form and show excel equations.