BUS1 173A San Jose State University Financial Management Questions

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BUS1 173A

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You are the Chief Financial Officer and lead Project Development President for a snack. You are presented with a few options about what to do next for value-creation from your teams. However, you must evaluate each project and then make the ultim choice on the project acceptance. The firm you work for is a large publicly traded company. It currently has 10,000,000 shares outstanding and 200,000 bonds o grows at 3% per year indefinitely. You also know that the company's current share price is $45. You also know that the beta o on a T-bill was 1.9%. The bonds for the firm were all issued on the same day in the past, November 2010, and have a maturity sold at full par value. These bonds possess an attractive yield and are currently priced at a premium, $1,200. The company ta Project 1: This new project will create avocado chips. It will cost $25,000,000 today for a new building and machines. We would invest in NWC equivalent of 10% of capital expenditure cost today. We know that this project will bring in sales of $14,000,000 in the first year, growing at a rate of 25% for the first 2 years and growing at a rate of 12% for the next 4 years. We employ a MACRS 7-year depreciation scale for all CAPEX. In year-end 3, we will have to purchase $9,000,000 in new machines. Net working capital account will be 25% of sales for each year. Costs of goods sold will be 50% of sales until we get the new machines at which they will drop to 38% of sales. After year 6, we are quitting the entire project and liquidating all, we can sell the original machines for $4million and the new machines for $4million. This project is in line with a new product division that has similar risk levels to existing operations. MACRS 7-year MACRS 20-year 1 0.1429 0.0375 2 0.2449 0.07219 3 0.1749 0.06677 4 0.1249 0.06177 Which Project would you choose and why? For project 1, how did you select the discount rate and why? For project 1, if costs across all years went to 55% of sales revenues, what would be the new NPV? If this scenario, sensitivity or simulation analysis? As a financial manager, describe and explain some factors (or advantages/disadvantages) to consider when deciding which financing choices (aka capital structure) could be used for this project. Of the three motives for holding cash within a firm, which do YOU feel is most important, and why (no right/wrong choice, if the choice is explained correctly)? Define your choice and why you chose it. What are the major costs associated with holding cash in a firm? Of the five reasons given for why investors may prefer dividends, which do you think sounds most belivable/plausible? Define your choice and why you chose it? resented with a few options ject and then make the ultimate anding and 200,000 bonds outstanding. The company's most recently paid dividend was $3 per share, this dividend ou also know that the beta of the firm is 1.2 and the expected return on the market is 9%. The most current rate offered er 2010, and have a maturity date of November 2040. They pay 8% coupons, are paid semiannually, and were originally um, $1,200. The company tax rate is 21%. Project 2: This new project will be production of bamboo utensils (forks, knives, etc.). Bamboo is more sustainable than plastic, it can be reused, has natural antimicrobial properties, and is one of the fastest growing plants in the world. This project will cost $11,000,000 today to purchase the land and creation of the bamboo farm. It will cost $6,000,000 for the machines needed to process and produce the utensils. The farm will be depreciated as a 20-year MACRS class and the machines following the 7-year MACRS class. The first year of sales will be $7,000,000; however, we cannot begin selling until we have grown bamboo, so not until after year 2. The NWC needed today will be $1,000,000 and will simply be recovered at the end of the project life. Given our farming, we do not need to purchase the machines until the end of year 2. This project, from today, will last 8 years. At the end of year 8, we will sell our farm for a projected $15,000,000 and our machines are worthless. Sales will grow at a rate of 25% per year and costs will be 40% of revenues in year one and steadily decrease by 3% per year (e.g. next year will be .4(1-.03) COGS). This project is more risky and will require an 13% rate of return. 5 0.0893 0.05713 6 0.0892 0.05285 7 0.0893 0.0488 8 0.0446 0.04522
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Explanation & Answer

Please view explanation and answer below.Sorry, i had submitted the wrong documents. Attached is the right excel document
Please view explanation and answer below.

You are the Chief Financial Officer and lead Project Development President for a snack. You are presented with a few options
about what to do next for value-creation from your teams. However, you must evaluate each project and then make the ultim
choice on the project acceptance.

The firm you work for is a large publicly traded company. It currently has 10,000,000 shares outstanding and 200,000 bonds o
grows at 3% per year indefinitely. You also know that the company's current share price is $45. You also know that the beta o
on a T-bill was 1.9%. The bonds for the firm were all issued on the same day in the past, November 2010, and have a maturity
sold at full par value. These bonds possess an attractive yield and are currently priced at a premium, $1,200. The company ta
Project 1: This new project will create avocado chips. It will cost $25,000,000 today for a new building and
machines. We would invest in NWC equivalent of 10% of capital expenditure cost today. We know that this
project will bring in sales of $14,000,000 in the first year, growing at a rate of 25% for the first 2 years and
growing at a rate of 12% for the next 4 years. We employ a MACRS 7-year depreciation scale for all CAPEX.
In year-end 3, we will have to purchase $9,000,000 in new machines. Net working capital account will be
25% of sales for each year. Costs of goods sold will be 50% of sales until we get the new machines at which
they will drop to 38% of sales. After year 6, we are quitting the entire project and liquidating all, we can sell
the original machines for $4million and the new machines for $4million. This project is in line with a new
product division that has similar risk levels to existing operations.

MACRS 7-year
MACRS 20-year

1
0.1429
0.0375

2
0.2449
0.07219

3
0.1749
0.06677

4
0.1249
0.06177

Which Project would you choose and why?

I would choose project 2 as it has the Highest NPV as compared to project 1, This means that the sec...


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