Here is the summarized four average risk projects with their rate of returns for Skye Computer Company

Project Name	Expected Rate of Return
1- Building Hospital	17.00%
2- Building School	16.00%
3- Building Stadium	10%
4- Building Park	11.26%

The common stock sells for $55.00, last year’s dividend D₀ was $2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skye's preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30 per share. The firm can issue long-term debt at an interest rate (or before-tax cost) of 10%, and its marginal tax rate is 35%. The firm's currently outstanding 10% annual coupon rate long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skye's beta is 1.516. In its cost of capital calculations, the company’s capital structure consists of 64.7% common stock, 28.2% debt, and 7.1% preferred stock.

1. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock.
2. If Skye continues to use the same capital structure, what is the firm's WACC assuming that it expands so rapidly that is must issue new common stock?
3. Assume that all projects are equally risky and based on WACC,  which project should Skye Computer Companyaccept and which to be rejected? Explain why?
4. Smith Technologies has a WACC of 14%, and is currently evaluating two projects for this year’s capital budget. Project A has a cost of $6000 and its expected cash inflows are $2000 for 5 years. Project B has a cost of $18000 and its expected cash inflows are $5600 for 5 years.
5. a. Calculate NPV, IRR, payback for each project.
6. b. Assuming the projects are independent which one(s) would you recommend for each method? Why?
7. c. If the projects are mutually exclusive, which would you recommend for each method? Why?

A Vivical Company is considering a new project and must choose between the following mutually exclusive projects:

• Project A: Establishing Advertising Agency
• Project B: Establishing Travel Agency

The firm could spend $10,000 on Project A. Its expected cash inflows of $4,000 during the first 2 years while the third and fourth years, cash flow will increase by $200 each year.

However, project B would cost $ 15,000. Its expected cash inflow is $4,800 for first year and is expected to increase by $150 every year.

1. Draw the timeline for both projects and find the NPV, IRR, and Payback Period for both projects Advertising Agency and Travel Agency.
2. Based on NPV and IRR valuation methods, which project should Vivical Company accept and which should they reject? Explain why.

Vivical has a WACC of 15%

Patchi Chocolate Co. expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $32.50 per share.  New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred.  What would be the cost of equity from new common stock?

LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%.  Which of the following projects (A, B, and C) should the company accept?

Answer rating: 100% (QA)

Question 1 Here is the summarized four average risk projects with their rate of returns for Skye Computer Company Project Name Expected Rate of Return 1 Building Hospital 1700 2 Building School 1600 3 ... View the full answer