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Using the company information provided below, complete the following two tabs in this MS Excel Workbook:
– Computation of the company's estimated cost of equity capital, r E, and weighted average cost of capital, r WACC
– NPV (capital budgeting) analysis of the company's proposed investment in a new Product B 17S8W2
The background paper, Capital Budgeting and the Cost of Capital , provides useful guidance for completing this assignment.
Based on the results of your NVP Analysis, summarize your recommendations to management regarding its contemplated introduction of the
new product. Limit the length of your response to 75 words.
NPV (Net Present Value) capital investment appraisal technique incorporates the time value of money
concept. As a general rule, a project having positive NPV is preferred.
In this case, the calculated NPV of the new product is $2,524,179, which means that the introduction of the
product B (i.e. new product) is feasible as because it is expected to generate higher returns than the require
rate of return (i.e. because of the positive Net Present Value).
North American Manufacturing Company is a U.S.-based publicly traded company, whose stock is listed on a national securities exchange.
Management looked up the stock's historical β (beta) at a popular financial Web search engine and obtained this additional information:
Historical β (beta) of the company's common stock
0.095 (9.5 percent)
0.400 (40.0 percent)
Current market interest rate on the company's new borrowings, r D
Company's combined effective income tax rate, t
0.125 (12.5 percent)
0.040 (4.0 percent)
Management's estimate of the expected rate of return on the “market portfolio,” r M
Management's estimate of the risk-free interest rate, r F
The balance sheet of the company as of its most recent fiscal year end reflects management's targeted capital structure for the company.
That balance sheet reports the following liability and shareholders' equity balances:
Notes payable to banks - current portion
Bonds payable - current portion
Notes payable to banks - noncurrent portion
Bonds payable - noncurrent portion
Common stock, at par
Additional paid-in capital
Cost of recently completed test-marketing of Product B
Costs of previously incurred Product B research and development (R&D) costs
Management's estimate of the economic life of Product B
Cost of additional machinery and equipment (M&E) needed to manufacture Product B
Fair value of vacant building owned, to be used as Product B manufacturing facility
Estimated residual (fair) value of M&E at end of invest...