project for corporate finance
THIS IS THE SECOND PART FROM A 5 PART
BOOK : Ross, S. A., Westerfield, R. W. & Jaffe, J. (2016). Corporate Finance. (11th ed.). . New York, NY: McGraw-Hill, ISBN: 097812597241
DISCUSSION QUESTION:
Due July 29 at 11:59 PM
Respond to the questions using the lessons and vocabulary found in the reading.
Support your answers with examples and research and cite your research using the APA format.
Start reviewing and responding to the postings of your classmates as early in the week as possible.
Investment Alternatives and Capital Budgeting Methodologies
Some companies’ common stocks pay cash dividends, while others’ do not. However, most bond issues do pay periodic interest. The preferred stock financing option also pays a dividend. Based on your readings, please respond to the following questions below:
- From the investor’s point of view, analyze the advantages and disadvantages of the three investment alternatives—common stock, bonds, and preferred stock. Why would an investor select an investment in bonds over common stock, even if the return on the common stock investment is higher?
- From the firm’s perspective, evaluate the pros and cons of using different combinations of debt, common stock, and preferred stock to raise funds. Why do some firms use preferred stock and others do not? Is it a matter of subjective preference, or are there sound theoretical reasons for the use of specific sources of funding?
- How does an investor’s evaluation of the investment alternatives differ from the evaluation by a company trying to raise funds?
- Among all the capital budgeting methodologies and their respective rules, which would you use and why? What are the advantages of one rule over another? Does the size or the nature of an investment have any impact on which method should be used? Why or why not? How might a rule be improved to make it more effective?
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Assignment
Due JULY 30TH at 11:59 PM
Bottom of Form
Your probationary period at the Cosmo K Manufacturing Group continues. Your supervisor, Gerry, assigns you a project each week to test your competence in finance. This week, Gerry has asked you to evaluate several investment opportunities available to the company. Your instructions are to consider each situation independently of the others, unless otherwise indicated.
Evaluating Investment Opportunities
Consider the following situations and answer the related questions:
- Your company has the opportunity to make an investment that promises to pay $24,000 after 6 years. If your company has a required return of 8.5% on this type of investment, what is the maximum amount that the company should pay for the investment? Explain your answer.
- In the previous scenario, assume that your company negotiated a deal where it would pay $12,000 for the investment and receive a payment of $24,000 at the end of 7 years. What is the IRR on this investment? Should the company make the investment? Explain your answer.
- Another investment opportunity available to your company involves the purchase of some common stock from Zorp Corporation. The company has asked you to evaluate the stock, which paid a dividend of $4.25 last year and is currently selling for $36 per share. If your company decides to buy the stock, the stock will be held for 5 years and then sold. The growth rate on the stock is constant at 3% per year, and your company’s required return on the stock would be 11%. What is the maximum price per share that your company should pay for the stock?
- Zorp Corporation also has some bonds for sale that your company is considering. These bonds have a $1,000 par value and will mature in 16 years. The coupon rate on the bonds is 5% paid annually, and they are currently selling for $987 each. The bonds are call protected for the next 4 years, and after this period, they are callable at 105. On the basis of this information, answer the following questions:
- What is the YTM on these bonds?
- If the bonds are called immediately after the call protection period, what would be the yield to call (YTC)?
- If the bonds paid interest semiannually instead of annually, would the YTC, the YTM, or both change? Explain your answers.