Sprint LTE 11:57 AM outlook.office.com Sophia was recently hired by Great Wall C

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Sprint LTE 11:57 AM outlook.office.com Sophia was recently hired by Great Wall Co. as a junior budget analyst. She is working for the Venture Capital Division and has been given for capital budgeting projects to evaluate. She must give her analysis and recommendation to the capital budgeting committee. Sophia has a B.S. in accounting from WWU (2007) and passed the CPA exam (2008). She has been in public accounting for 2 years. During that time she MBA from Seattle U. She would like to be the CFO of a company someday-maybe Great Wall Co. --and this is an opportunity to get onto that career track and to prove her ability earned an As Sophia looks over the financial data collected, she is trying to make sense of it all. She already has the most difficult part of the analysis complete the estimation of cash flow Through some internet research and application of finance theory, she has also determined the firm's beta. Here is the information that Sophia has accumulated so far The Capital Budgeting Projects She must choose one of the four capital budgeting projects listed below: Table 1 0 (26,000,000) (23,500,000) (19,500,000) (9920,000) 7,500,000 7,700,000 7,700,000 9,900,000 500,000 020000gh 200,000 7, 5500,000 1200.0600 50000 Risk Low Average Table 1 shows the expected after-tax operating cash flows for each project. All projects are expected to have a 4-year life. The projects differ in size (the cost of the initial investment), and their cash flow patterns are different. They also differ in risk as indicated in the above table. The capital budget is S20 million and the projects are mutually exclusive. Capital Structures Great Wall Co. has the following capital structure, which is considered to be optimal?

Explanation / Answer

(1) Par Value = $ 1000. Coupon = 11% semi-annual coupon, Tenure = 15 years or 30 half-years, Market Price = $ 1180

Let the yield to maturity be 2R % per annum

Semi-Annual Coupon - 0.11 x 0.5 x 1000 = $ 55

Therefore, 1180 = 55 x (1/R) x [1-{1/(1+R)^(30)}] + 1000/(1+R)^(30)

Using EXCEL's Goal Seek Function to calculate R, we get:

R = 0.04407 or 4.407 %

Yield to Maturity = Cost of Debt = 4.407 x 2 = 8.814 %

(2) Par Value = $ 100, Dividend Rate = 9.5 % and Current Market Value = $ 115

Annual Dividend = 0.095 x 100 = $ 9.5

Cost of Preferred Stock = 9.5 / 115 = 0.08261 or 8.261 %

(3) (i) Treasury Security Rate = Risk-Free Rate = 3.5 %, Market Portfolio Return = Rm = 10.25 % and Beta = 1.35

Using CAPM, Cost of Equity = Risk-Free Rate + Beta x (Rm - Risk Free Rate) = 3.5 + 1.35 x (10.25 - 3.5) = 12.6125 %

(ii) D0 = $ 4,5 and dividend growth rate = g = 8.5 % and current stock price = P0 = $ 128

D1 = 4.5 x (1+g) = 4,5 x (1.085) = $ 4.8825

Let the cost of equity be Ke

Therefore, Ke = (D1/P0) + g = (4.8825/128) + 0.085 = 0.123144 or 12.3144 %

NOTE: Please raise separate queries for solutions to the remaining sub-parts.

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