What are capital budgeting and dividend policies?

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Business Finance

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Cramer Industries has identified several investment opportunities that will become available over the next year and would like you to evaluate these projects. They have asked that you use the NPV and IRR methods to determine if these independent projects are acceptable. For the NPV, use a required rate of return of 8%..

Table-1:

Project

Cash Flows/Year
(in thousands)

Length of Project

Cost and Date when Cost is incurred

A

$ 2,300.00

5 years

$ 8,000.00 @t=0

B

$ 3,000.00

5 years

$ 10,000.00 @t=0

C

$ 2,800.00

5 years

$ 9,000.00 @t=0

D

$ 2,100.00

5 years

$ 8,500.00 @t=0

Cramer currently has 2,000,000 shares outstanding and pays a dividend of $2 per share.

With a high degree of certainty, Cramer has projected their income for the next four years as follows, which includes the annual cash flows from the investments selected above:

Table-2:

Year

Income After Taxes

1

$6,000.00

2

$8,000.00

3

$5,000.00

4

$7,000.00

Questions:

  1. What is the NPV for each project at the time the investment would be made? Explain your findings.
  2. What is the IRR for each project at the time the investment would be made? Explain your findings
  3. Which investments should be selected? Justify your conclusions.
  4. What will the dividends per share and the external financing required, if the current dividend per share is maintained? If the projects meet the NPV and IRR tests, assume that Project ‘A’ is implemented in Year 1, Project ‘B’ in Year 2, Project ‘C’ in Year 3 and Project ‘D’ in Year 4. Justify your conclusions.
  5. Assuming the same investment patterns as in Part 4, what will be the dividends and the external financing required, if the dividend per share payout ratio of 50% is maintained? Explain your answers.
  6. Assuming the same investment patterns as in Part 4, if the dividend policy is considered a residual decision, what will be the dividends and external financing requirement in each year? Explain your answers.
  7. Under which policy will external financing be minimized? Justify your conclusions.

Present your analysis of the assigned problems in Excel format (Module 3 Assignment 2 template). Enter non-numerical responses in the same worksheet using text boxes.

Unformatted Attachment Preview

Template for the Module 1_Assignment 3 Firm's Cost of Capital Year Annual Cash Flows 0 1 2 3 4 5 Part 1: Calculate the Net Present Value and Explain Results YouTube Link on How to do NPV Calculations in Excel below. Copy and paste into your browser https://www.youtube.com/watch?v=YdCkyNMFbOo PV of Savings Initial Investment Net Present Value hover over cell to see comments - hint: (NPV) Explain results below Part 2: Calculate the Internal Rate of Return and Explain Results YouTube Link on How to do IRR Calculations in Excel below. Copy and paste into your browser https://www.youtube.com/watch?v=xzqpfpq6vSk Internal Rate of Return (IRR) Explain results below hint: Part 3: Calculate the Payback Period and Explain Results YouTube Link on How to do Payback Calculations in Excel below. Copy and paste into your browser https://www.youtube.com/watch?v=NwSmUDvWTPA Annual Cash Flows Payback Period hint: Balance Forward Explain results below hint: Part 4: Calculate the Discounted Payback Period and Explain Results YouTube Link on How to do Discount Payback Calculations in Excel below. Copy and paste into your browser https://www.youtube.com/watch?v=XwwLC7ood2U Annual Cash Flows Firm's Cost of Capital 8% - - - - Explain results below hint: Part 5: Analyze Results and Make Recommendations References: Module 2_Assignment 2 (Template) Question 1: What is the Beta Coefficient for Concordia? Table-1: Plant Beta Coefficient % of Concordia's Income South Town 0,85 55% North Town 0,90 20% East Town 1,25 15% West Town 1,60 10% Question 1: Beta Coefficient for Concordia Explain your answer: ← hint Solution Question 2: What is the Required Rate of Return for Concordia? Risk-free Rate Market Risk of Interest Premium (RP) (RF) 3,00% 4,00% Explain your answer: ← hint ← hint ← hint Concordia's Concordia Composit Beta (B) Required Rate of Return (kreq) ← hint Question 3a: What is the equation for the Security Market Line (SML)? ← hint 3b: Graph the equation 3c: Explain what the SML is telling you and the implications for the firm ← hint Question 4: Based on the information provided in the case, if the new plant is expected to return 12%, should Concordia make the investment? Explain your answer and justify your calculations. ← hint References: Module 3_Assignment 2 Template Cost of Capital Year 0 1 2 3 4 5 PV of CF's NPV IRR $ $ $ $ $ $ 8,0% Project A (8.000,00) 2.300,00 2.300,00 2.300,00 2.300,00 2.300,00 $ $ $ $ $ $ 8,0% Project A (10.000,00) 3.000,00 3.000,00 3.000,00 3.000,00 3.000,00 $ $ $ $ $ $ 8,0% Project A (9.000,00) 2.800,00 2.800,00 2.800,00 2.800,00 2.800,00 $ $ $ $ $ $ 8,0% Project A (8.500,00) Initial Cost 2.100,00 2.100,00 Positive 2.100,00 Cash Flows 2.100,00 2.100,00 ← Hint Part 1a: Find NPV for each project Project A Project A https://www.youtube.com/watch?v=s2ZZFjC2UBU NPV $0 $0 Project A Project A ← Hint $0 $0 Part 1b: Explain your findings Part 2a: Calculate the IRR for each project https://www.youtube.com/watch?v=z_EXlBMpzeQ Project A Project A IRR 0,0% 0,0% Part 2b: Explain your findings Part 3: Which projects should be selcect and why? ← Hint Project A 0,0% Project A 0,0% Assume for Parts 4 , 5 and 6 that if the projects meet the NPV and IRR test, Project A will be implimented in Year 1, Project B will be implement in Year 2, Project C will be implemented in Year 3 and Project D will be implemented in Year 4. Part 4: What will the total dividends and the external financing be if the current dividend per share is maintained? Year After Tax Income 1 2 3 4 $ $ $ $ Dividend Capital Expenditure External Funding Required 6.000,00 8.000,00 5.000,00 7.000,00 Additional Funding Required ← Hints ← Hint Part 5: What will the total dividends and the external financing be if the dividend payout ratio is 50% of After-Tax Income? Year After Tax Income 1 2 3 4 $ $ $ $ Dividend Capital Expenditure External Funding Required 6.000,00 8.000,00 5.000,00 7.000,00 Additional Funding Required ← Hints ← Hint Part 6: What will the total dividends and the external financing be if the company uses a residual dividend payout policy? Year After Tax Income 1 2 3 4 $ $ $ $ 6.000,00 8.000,00 5.000,00 7.000,00 Dividend Capital Expenditure External Funding Required ← Hints Additional Funding Required ← Hint Part 7: Under which dividend policy would the external funding requirement be minimized? Be sure to justify your answer. References: Module 4_Assignment 2 Template Question 1a: What is the annual cost, before any tax considerations of the lease options? Question 1b: Are there any tax considerations and if so, what is the after-tax annual cost of the lease? annual lease payments year net lease payment after-tax annual tax savings ← Hints 1 2 3 4 Total ← Hint Question 2: What is the total cost of leasing the truck today? Net lease payment after-tax Cost of Capital Number of lease payments Total cost of leasing truck today https://www.youtube.com/watch?v=r_hOGfSgvHQ ← Hints ← Hint Question 3: What are the annual cash flows if the truck is purchased with debt financing? Depreciable Value of Truck Year Depreciation Depreciation Rate using Write-off per MACRS Year Annual Tax Savings ← Hints 1 2 3 4 Total Tax-Savings Year Annual Cost of Annual TaxTruck Savings ← Hint Annual Cash Outflow ← Hints 1 2 3 4 Cost to Purchase less Tax-Savings Question 4: What is the cost of purchasing the truck with debt financing today? Cost of Truck less: TaxSavings Net Cost of Truck Question 5: Make a recommendation to your boss as to whether the company should buy or lease the truck. Justify your recommendation References: Module 5, Assignment 1 Template Part 1: Collections and Payments JAN SALES (given) 162.000 % FEB 168.000 MARCH 324.000 Collections Month of Sale Month after Sale 2nd Month after Sale Total Recepts Purchase of Labor and Materials Purchase of Labor and Materials Payment Part 2: Net Cash Flow for the Month Total Receipts: Payments: Labor and Materials (from above) Administrative Salaries Lease Payments Income taxes Miscellaneous Expenses Boat Dock Total Payments Net Cash Surplus (Deficient) Part 3: Surplus or Loan Requirements Cash at beginning of the month Cumulative Cash Less: Minimum Cash Surplus/Loan Requirements MARCH APRIL 485.000 MAY 648.000 JUNE 325.000 JULY 325.000 AUG 80.000 SEPT 162.000 APRIL MAY JUNE JULY AUG SEPT
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Explanation & Answer

Here is the answer. Please check the full answer and explanation in Module 3 Assignment 2 template.Please let me know if any clarification to answer is required. I will provide that. Thank you

Template for the Module 1_Assignment 3
Firm's Cost of Capital
Year

Annual Cash Flows
0
1
2
3
4
5

Part 1: Calculate the Net Present Value and Explain Results
YouTube Link on How to do NPV Calculations in Excel below. Copy and paste into your browser

https://www.youtube.com/watch?v=YdCkyNMFbOo
PV of Savings
Initial Investment
Net Present Value

hover over cell to see comments

-

hint:
(NPV)

Explain results below

Part 2: Calculate the Internal Rate of Return and Explain Results
YouTube Link on How to do IRR Calculations in Excel below. Copy and paste into your browser

https://www.youtube.com/watch?v=xzqpfpq6vSk
Internal Rate of Return
(IRR)
Explain results below
hint:

Part 3: Calculate the Payback Period and Explain Results
YouTube Li...


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