Answer the following questions:

1. Suppose that you are a financial analyst for a supermarket chain. You have been tasked with presenting a proposal for a 15 store expansion. Discuss this proposal in connection with the following concepts;

i) capital budgeting,
ii) the weighted average cost of capital (WACC),
iii) the optimal capital structure, and
iv) the optimal capital budget.

Be sure to discuss in context. No calculations are necessary.

2. For the companies listed below discuss what you believe has been the decision making that was involved with dividends on common stock.
Provide financial metrics that support your answer. You may wish to look at www.dividendinvestor.com, as well as Yahoo!Finance for financial information.
The companies are:
i) Bed Bath & Beyond Inc. (BBBY),
ii) Williams-Sonoma Inc. (WSM), and
iii) Home Depot, Inc. (HD)

3. For the same above named three companies: BBBY, WSM, and HD discuss the investing and financing decisions that relate to Working Capital Management. Provide financial metrics that relate to working capital management to support your discussion.

4. You are the CFO of SlimBody, Inc., a retailer of the exercise machine Slimbody6 and related accessories. Your firm is considering opening up a new store in Los Angeles. The store will have a life of 20 years. It will generate annual sales of 5,000 exercise machines, and the price of each machine is $2,500. The annual sales of accessories will be $600,000, and the operating expenses of running the store, including labor and rent, will amount to 50 percent of the revenues from the exercise machines. The initial investment in the store will equal $30 million and will be fully depreciated on a straight-line basis over the 20-year life of the store. Your firm will need to invest $2 million in additional working capital immediately, and recover it at the end of the investment. Your firm’s marginal tax rate is 30 percent. The opportunity cost of opening up the store is 10 percent.
At the end of the store’s life, the company expects to sell various fixtures and equipment for $2,000,000.
Required:

a) Determine the payback period for the project.
b) Determine whether or not the project should be undertaken using the Net Present Value method.

5. As a consultant to Gamma Skiwear, you have been asked to determine the appropriate discount rate to use in the evaluation of several projects. You have determined the firm’s current capital structure (which the firm considers to be its target mix of financing sources) as follows:
Source of capital Market value
Bonds $500,000
Preferred stock $100,000
Common stock $400,000

To finance acceptable projects, Gamma will sell 20-year bonds with a market rate of 9%. Preferred stock paying a $2.50 dividend can be sold for $24 per share. Common stock for Gamma is currently selling for $50 per share. The firm paid a $2 dividend last year and expects dividends to continue growing at a rate of 4% per year into the indefinite future. The firm’s tax rate is 35% percent.

The projects that Gamma is considering are as follows:

Project Risk Expected Return Amount
A High 15% $400,000
B Average 12% $300,000
C High 11 % $600,000
D Low 9% $200,000
E Low 6% $300,000

Gamma evaluates average projects at its weighted average cost of capital; evaluates low risk projects at a one percent discount; and, evaluates high risk projects at a three percent premium over the WACC.

i) Which projects should be accepted to create maximum value?

Answer the following questions: 1. Suppose that you are a financ...