QUESTION ONE ((40 Marks) COMPULSORY) Assume that, BJLM Company issues a $1000, 8 percent, 20-year bond...

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QUESTION ONE ((40 Marks) COMPULSORY) Assume that, BJLM Company issues a $1000, 8 percent, 20-year bond whose net proceeds are $940. Suppose that the BJLM Company has preferred stock that pays a $13 dividend per share and sells for $100 per share in the market. The flotation (or underwriting) cost is 3 percent per share. Assume that the market price of the BJLM Company's stock is $40. The dividend to be paid at the end of the coming year is $4 per share and is expected to grow at a constant annual rate of 6 percent. Assume further that the company will only be able to raise common stock value of the required funds by issuing 50,000 of new shares to non-current stock holders of stock A and its flotation cost is 10 percent. Assume the following capital structure for the Carter Company: Mortgage bonds ($1,000.00 par) $20,000,000.00 Preferred stock ($100.00 par) $5,000,000.00 Common stock ($40 par) $20,000,000.00 and Retained earnings of $5,000,000.00. Assume further that BJLM has two projects A and B that it is contemplating to invest into with Project A having the estimated revenue of $2,000,000 at the end of year one and $1,000,000 for project B in the same year. In the second year project A is expected to have revenue of $2,000,000.00 and $1,000,000.00 for project B. In year three project A is projected to have a total revenue of $3,000,000.00 and $2,000,000.00 for project B. Year four project A will have a total revenue of $3,000,000.00 and $6,000,000.00 for project B. In year five revenue is projected at $3,000,000.00 for project A and $4,000,000.00 for project B. Note that the initial investment for both projects is $10,000,000.00 Note that the tax shield is 60 percent. Required: a) Discuss leasing and explain the forms of leases(5 Marks) b) Compute the weighted average cost of capital of BJLM. (18 Marks) c) Assuming that the discount rate is 15% compounded annually, which of these two projects (A or B) would you advise the company to invest in? Using i) NPV ii) Payback period method. (10 Marks) d) An investment project requires an initial outlay of $8,000,000.00 and will produce a return of $17,000,000.00 at the end of 5 years. Use the internal rate of return method to QUESTION ONE ((40 Marks) COMPULSORY) Assume that, BJLM Company issues a $1000, 8 percent, 20-year bond whose net proceeds are $940. Suppose that the BJLM Company has preferred stock that pays a $13 dividend per share and sells for $100 per share in the market. The flotation (or underwriting) cost is 3 percent per share. Assume that the market price of the BJLM Company's stock is $40. The dividend to be paid at the end of the coming year is $4 per share and is expected to grow at a constant annual rate of 6 percent. Assume further that the company will only be able to raise common stock value of the required funds by issuing 50,000 of new shares to non-current stock holders of stock A and its flotation cost is 10 percent. Assume the following capital structure for the Carter Company: Mortgage bonds ($1,000.00 par) $20,000,000.00 Preferred stock ($100.00 par) $5,000,000.00 Common stock ($40 par) $20,000,000.00 and Retained earnings of $5,000,000.00. Assume further that BJLM has two projects A and B that it is contemplating to invest into with Project A having the estimated revenue of $2,000,000 at the end of year one and $1,000,000 for project B in the same year. In the second year project A is expected to have revenue of $2,000,000.00 and $1,000,000.00 for project B. In year three project A is projected to have a total revenue of $3,000,000.00 and $2,000,000.00 for project B. Year four project A will have a total revenue of $3,000,000.00 and $6,000,000.00 for project B. In year five revenue is projected at $3,000,000.00 for project A and $4,000,000.00 for project B. Note that the initial investment for both projects is $10,000,000.00 Note that the tax shield is 60 percent. Required: a) Discuss leasing and explain the forms of leases(5 Marks) b) Compute the weighted average cost of capital of BJLM. (18 Marks) c) Assuming that the discount rate is 15% compounded annually, which of these two projects (A or B) would you advise the company to invest in? Using i) NPV ii) Payback period method. (10 Marks) d) An investment project requires an initial outlay of $8,000,000.00 and will produce a return of $17,000,000.00 at the end of 5 years. Use the internal rate of return method to