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Project I-New Venture

The costs of individual capital components as computed below: a. The cost of long-term debt as computed at 6. 6% is the after-tax result of 11%. The said 11% is computed using a financial calculator after having as input the bond price of 874. 4, the interest paid of annuity payment of 1,000 and 30 interest period due to 15 years period to maturity payable semi-annually. The same rate is the equivalent of yield to maturity of the bond. b. The cost of preferred stock should be at 9%, which is the dividend perpetual rate given per case facts. Compute the NPV for Project I at the risk-adjusted cost of capital for the project.

Should management adopt this project based on your analysis? Explain. Would your answer be different if the project were determined to be

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of average risk? Explain. (8 points). The computed NPV for Project I at the risk-adjusted cost of capital for the project would be $16. 82 million as shown below. Based on analysis made, management should adopt this project since a positive NPV means that it will provide more wealth for stockholders than the alternative use of the money. If the project were determined to be

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of average risk, with more reason that the project should be accepted.

Average risk means lower cost of capital or lower discount rate and the effect would be higher net present values. The answer is further supported by having a very high IRR of 53%. 14. Conclude the project with your reflections on what you have learned from this course and how it has affected your view of your own job and career (5 points). I have learned so much from this exercise as it let me applied my learning from the subject. I have learned that it is very important for a company to know its cost of capital, which can be complicated because of the need to consider the composition of capital.

However, with this exercise and more practices that I will be doing, I know that I can build stronger confidence to myself how to take advantage of the learning from this paper. It has affected my own job and career in a positive way at it makes me now more scientific in approach in evaluating project proposals. I believe I can apply the finance principles learned in this course in other finance-related matters. References: Brigham and Houston (2002) Fundamentals of Financial Management, London: Thomson South-Western Given case study. .

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