finance

FIN220 SEM 161 Page 1 of 4 SECTION : 1, 2 STUDENT S DETAILS Student Name Student ID INSTRUCTION FOR SUBMISSION OF HARD COPY (PRINT) ASSIGNMENT 1. Read and sign your cover sheet. 2. Attach this sheet to the front of your assignment. 3. Your assignment should be submitted to the relevant lecturer. ASSIGNMENT DETAILS Assignment Title: ASSIGNMENT 3 – MODULE 4&5 Lecturer’s Name MOHAMAD ZAHID Program Name Course Code FIN220 Course Name Principles of Finance Due Date 05TH JANUARY 201 7 OR EARLIER Date submitted REQUEST FOR EXTENSION All work must be submitted by the due date. An application to extend the due date on the basis of special consideration must be authorized by the course lecturer. Extension granted until (date) N/A Lecturer’s Signature Remarks: Cheating and assisting to cheat are offences under the Yanbu University College’s policy. STUDENT S’ STATEMENT We have read and understood the information provided on this assignment cover sheet and in the college’s policy relating to cheating and assisting to che at, collaboration and plagiarism. I certify that the attached work is entirely my own except where work quoted is duly acknowledged in the text; that I have not worked with another person or persons except where specifically permitted by the lecturer, and that this work has not been submitted for assessment by myself or any other person in any other time. I have retained a copy of my work. Students’ Signature Mark/Grade Assessed by & Date OBJECTIVE MANAGEMENT SCIENCE DEPARTMENT Assignment Cover Sheet FIN220 SEM 161 Page 2 of 4 The objective of this is to apply capital budgeting and cost of capital concepts into solving the problems. GENERAL INSTRUCTIONS: - 1. Record all the answers in the word template or it can be handwritten. 2. You must submit your answer in hardcopy. 3. The d ead line for submission is on THURSDAY , 05TH JANUARY 2016 OR EARLIER . 4. Late submission will not be entertained. THE COVER PAGE SHOULD CARRY THE FOLLOWING: – 1. Name and logo of the University College 2. Program title 3. Subject code and title 4. Name of lecturer 5. Name and ID of every member of your group 6. Date of submission INSTRUCTIONS Answer all questions. All answers must be neatly written. Show all calculations where appropriate. FIN220 SEM 161 Page 3 of 4 QUESTION 1 Meacham Corp. wants to issue bonds which can be sold at a market price of $540.27 for each bond . The bond will have 8 years maturity period. Meacham Corp. common stock currently sells for $30 per share. Meacham can sell additional shares by incurring flotation costs of $3 per share.

Meacham paid a dividend yesterday of $4.00 per share and expects the dividend to grow at a constant rate of 5% per year. Meacham also expects to have $12 million of retained earnings available for use in capital budgeting projects during the coming year. M eacham's capital structure is 40% debt and 60% common equity. Meacham's marginal tax rate is 35%. a. Calculate the cost of debt before tax and after -tax cost of debt assuming Meacham's bonds are its only debt. b. Calculate the cost of retained earnings. c. Calculat e the cost of new common stock. d. Calculate the weighted average cost of capital assuming Meacham's total capital budget is $30 million. QUESTION 2 The following market information was gathered for the Blender Corporation. The firm has 1,000 bonds outstan ding, each selling for $1,100.00 with a required rate of return of 8.00%. Blender Corporation has 5,000 shares of preferred stock outstanding, selling for $40.00 per share and 50,000 shares of common stock outstanding, selling for $18.00 per share. If the preferred stock has a required rate of return of 11.00% and the common stock requires a 14.00 % return, and the firm has a corporate tax rate of 30%, then calculate the firm's WACC adjusted for taxes. QUESTION 3 Company RH is considering two investments with 1 -year lives. The more expensive of the two is the better and will produce more savings. Assume these projects are mutually exclusive and that the required rate of return is 10 percent. Given the following free cash flo ws: A. Calculate the NPV for each project. B. Calculate the PI for each project. C. Calculate the IRR for each project. D. If there is no capital -rationing constraint, which project should be selected? If there is a capital - rationing constraint, how should the de cision be made? FIN220 SEM 161 Page 4 of 4 QUESTION 4 The Safa Corporation is consi dering purchasing one of two new equipment for the upcoming year. The more expensiv e of the two is better and will produce a higher yield. Assume these projects are mutually exclusiv e and that the required rate of return is 10 percent. Given the following free cash flows: a. Calculate the NPV of each project. b. Calculate the PI of each project. c. If there is no capital -rationing constraint, which project should be selected? If there is a capital - rationing constraint, how should the decision be made? QUESTION 5 Abu Luqman must determine what investment opportunities to undertake for his business Al -Afdhal Corporation. He is limited to a maximum expenditure of SR17,500 only for this capital budgeting period. The available projects with their respective IRR, NPV and PI for Al -Afdhal Corporation are listed below: Project Initial Capital Outlay in SR IRR NPV PI A 500 18% 50 1.10 B 5000 25% 6500 2.30 C 5000 37% 5500 2.10 D 7500 20% 5000 1.67 E 12500 26% 500 1.04 a. ACCORDING TO IRR CRITERIA, which projects would be selected base on the capital rationing constraint above? CALCULATE THE TOTAL NPV VALUE for the selected projects according to this ranking. b. ACCORDING TO PROFITABILITY INDEX (PI) CRITERIA, which projects would be selected base on the capital rationing constraint above? CALCULATE THE TOTAL NPV VALUE for the selected projects according to this ranking. c. From you calculation in A and B, Whic h set of projects would you choose under this capital constraint and explain why.