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Category > Business & Finance Posted 14 Aug 2017 My Price 8.00

Applied Technology Corporation (ATC) has the following capital structure:

Applied Technology Corporation (ATC) has the following capital structure:

 

 

CAPITAL STRUCTURE

Long-term Debt                                      $10,000,000

Common equity (1 million shares)          $20,000,000

$30,000,000

 

ATC's expected net income this year is $3,000,000. Its common stock price is $50 and investors requiring a rate of return of 15%. The long-term bond price is $1000 with the market interest rate of 10 percent today. The tax rate is 40 percent.

ATC has the following investment opportunities:

Annual Net   Project

Project    Cost                           Cash Flow                 Life (years)                           

A             1,000,000                   $219,120                    7                     

B             1,000,000                    319,775                     5                                 

C             1,000,000                    222,851                     8                                 

D             2,000,000                    368,580                     10                               

E             2,000,000                    542,784                     6                                 

 

Part I

a.        Determine the cost of capital for the company based on book value and market value of the capital structure.

b.        Which projects should ATC accept based on the book value and market value of weighted average cost of capital?

c.        What is the optimal investment budget for both capital structures?

Part II

Refer to the problem above and given the information below and answer the following questions:

Assume the project betas are as follows:

Project     A                    B                    C                    D                    E         

Beta        1.20                1.50                0.80                1.75                1.10

 

The risk-free rate is 5% and the market risk premium is 6%

 

a.      What are the costs of capital for each project?

b.     Show the NPV of each project?

c.      According to the risk characteristics of the projects; which project (projects) is appropriate to take?

Answers

Martinakom
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Status NEW Posted 14 Aug 2017 04:08 PM My Price 8.00

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