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.
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
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?
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Capital budgeting- It is an investment planning process which required to analyze the financial investment and return in certain period of time. It is mainly used when company want to invest into new process or want to establish new project for future benefit. For developing 15 new store companies have to focus over the investment and return. Long term investment in planning process is named as cash outflow in business and return is termed as inflow into business (Guilding, 2002). There is main investment in business for opening new store is incurred due to buildings and in product or services which we are offering. So company has to focus on both kinds of investment. If first month company spending $10000 and next month $10000 and it is continuous spending this much of amount for next five month and return will come when management will ready to cover this investment in future. There are various kinds of tools have been used for analyzing the return of the company. Company mainly used payback period, NPV and ARR methods to determine the selection of the project.
Capital budgeting for 15 stores required proper analysis of investment short term as well as long term. If capital investment on one firs is $3,00,000 then capital investment for 15 stores will be $4500000 and cash flow from one store is $10,000 then cash inflow of 15 stores will be $1,50,000. Tax will also apply on this income and depreciation of the capital investment will also take place. It is clear that company will have to manage all kinds of working expenditure of day to day life.
The weighted average cost of capital (WACC) - Cost of capital is the cost of the fund which has been collected from various sources. Sources of funds in business are important at the time of long term planning because cost is the expenditure of business which incurred loss in company balance sheet (Mukherjee, 2003). Generally company raises funds through loan, shareholder equity and preferential shares. Company has to return these amounts with specific rate of return which is termed as cost of capital. When company collectively measures the cost of all funds sources with their weight then it is called weighted average cost of capital. Cost of capital for undertaking company may be incurred when it rises through banks and take from investors as shareholders of business. For managing 15 store, company need more money which incurred more cost so selection of sources for developing fund should be select in a way that company have to pay less cost and it has high weight in company capital investment. If company is rising its fund with the help of loan and share capital and interest is cost of capital is 10% and 12 percent respectively then company have to focus over the sources of fund that can provide more fund in less cost of capital. If 70 percent capital is raised from banks and 30% of capital is raised through share capital then it has been determined by focusing over the weighted of capital and determine by considering both the cost of capital....
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