Project Selection and Risk

Jul 14th, 2016
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For Part 4-a of this week's project, Gerry has asked you to consider two mutually exclusive investments and incorporate risk considerations into the process of evaluation. For Part 4-b, Gerry has asked that you create your final report, incorporating your findings in Weeks 1–4 into a comprehensive document. This item will be called yourCourse Project Report and should be submitted in a Microsoft Word document. Review all your responses to Gerry's questions for Weeks 1 through 4 and make any corrections or improvements that have been provided to you. Then incorporate the revised work into your final report. Make sure you integrate the four parts so that your report reads as one report rather than four reports pasted together. Make sure all responses are complete and accurate, supported by references and documented examples.

Word Count: 1288
Showing Page: 1/7
The Cosmo K Manufacturing Group is considering the addition of a new smelting machine or a new paving minvestments are mutually exclusive; if one is selected, the other is rejected. The annual cash flows after taxesdepreciation, which begin one year from project start, and their respective probabilities are given below:Smelting MachineProbabilityNet Cash Flows per Year0.2$14,100.000.5$16,000.000.2$17,000.000.1$20,000.00Paving MachineProbability0. project has an expected life of 4 years and will cost $45,000. The riskier project will be evaluated at the3%, and the less risky project will be evaluated at the company's WACC. Cosmo K has the following capital sDebt:Preferred stock:Common stock:30%16%54%This capital structure is current and consistent with the company's objectives and so will be used to raise any nwill be raised using long-term bonds, with no short-term debt being used for the new project. New bonds will13%. The company's common stock is currently selling for $65 per share, paid a dividend of $4.25 last year, agrowth rate of 6% indefinitely. There will be no floatation costs on new common stock. Preferred stock can band pays a dividend of $10, with a floatation cost of $2 per share. Currently, the market risk premium is 5% aCosmo K's beta coefficient is currently 1.23 and is expected to be consistent for the foreseeable future. The ta40% for the next decade.a)What is the component cost of capital for the compa

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