assignment 203

Delp10

FIN200_EA_Deliverable1GuidelinesFall2020V1.pdf

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Copyrights ©American College of the Middle East, 2020

FIN200 – Managerial Finance

Fall2020

Project Deliverable 1 - Group Work (10 %)

Name ID

PROJECT TITLE: Project Cost of Capital

PROJECT OBJECTIVE:

The objective of the project is to help students visualize the decision-making process behind

choosing a corporate project based on fundamental capital budgeting techniques learnt throughout the

course incorporating and linking five basic concepts in finance: Time Value of Money, Cost of Capital,

Capital Budgeting, Stocks Valuation and Bonds Valuation. It will give students the chance of the application

of the basic concepts in finance, as well as interlinking most of the chapters in the course.

PROJECT GUIDELINE:

During the last few years, Harry Davis Industries has been too constrained by the high cost

of capital to make many capital investments. Recently, thought, capital costs have been

declining, and the company has decided to look seriously at a major expansion program

proposed by the marketing department.

Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task

is to estimate Harry Davis’s cost of capital. Jones has provided you with the following data,

which she believes may be relevant to your task.

Copyrights ©American College of the Middle East, 2020

a) The current price of Harry Davis’s 10 % coupon with semi-annual payment, with 15

years remaining to maturity is $3000. New bonds can be issued with $3000 face value.

The cost of debt is 1%. The firm’s tax rate is 35 %.

b) The current price for preferred shares in the market is $170 and the perpetual annual

dividend is $50.

c) Harry Davis’s common shares are currently selling at $35 per share, its last dividend (D0) was $5, and dividends are expected to grow at a constant rate of 3 % in the foreseeable future.

d) Harry Davis’s capital structure is 40 % long-term debt, 30 % preferred stock and 30 %

common stock.

Requirements

1. Mention the two ways that companies can raise common equity? (20 points)

2. Why does cost of capital play an important role in decision-making? (10 points)

3. Determine the Cost of Preferred Stock – rp. (15 point)

4. Determine the cost of Common Stock – rs. (20 point)

5. Calculate the WACC. (25 point)

6. When it comes to the return on invested capital and cost of capital, when should a company

accept or reject a project? (10 points)

Bonus Question: Which of the source of funds has the highest risk and explain why? (5 p.

Grading Rubric