Description
Problem Set #4
Attached Files:
 Question 1 – Build a Model – Matrix Computing.xlsx (20.094 KB)
 Question 2 – Build a Model – Pinto.com.xlsx (30.761 KB)
Question 1
Start with the partial model in the attached.
The stock of Matrix Computing sells for $65, and last years dividend was $2.53. Security analysts are projecting that the common dividend will grow at a rate of 9% a year. A flotation cost of 12% would be required to issue new common stock. Matrixs preferred stock sells for $42.00, pays a dividend of $3.32 per share, and new preferred stock could be sold with a flotation cost of 10%. The firm has outstanding bonds with 25 years to maturity, a 15% annual coupon rate, semiannual payments, $1,000 par value. The bonds are trading at $1,271.59. The tax rate is 20%. The market risk premium is 5.5%, the riskfree rate is 7.0%, and Matrixs beta is 1.2. In its costofcapital calculations, Matrix uses a target capital structure with 40% debt, 10% preferred stock, and 50% common equity.
a. Calculate the cost of each capital componentin other words, the aftertax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring flotation costs). Use both the CAPM method and the dividend growth approach to find the cost of equity.
b. Calculate the cost of new stock using the dividend growth approach.
c. Assuming that Matrix will not issue new equity and will continue to use the same target capital structure, what is the companys WACC
Question 2
Start with the partial model in the attached.
Pinto.com has developed a powerful new server that would be used for corporations Internet activities. It would cost $25 million at Year 0 to buy the equipment necessary to manufacture the server. The project would require net working capital at the beginning of each year in an amount equal to 12% of the years projected sales; for example, NWC_{0} = 12%(Sales_{1} ). The servers would sell for $21,000 per unit, and Pinto believes that variable costs would amount to $15,000 per unit. After Year 1, the sales price and variable costs will increase at the inflation rate of 2.5%. The companys nonvariable costs would be $1.5 million at Year 1 and would increase with inflation. The server project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. Also, the projects returns are expected to be highly correlated with returns on the firms other assets. The firm believes it could sell 2,000 units per year. The equipment would be depreciated over a 5year period, using MACRS rates. The estimated market value of the equipment at the end of the projects 4year life is $1 million. Pinto.coms federalplusstate tax rate is 20%. Its cost of capital is 10% for averagerisk projects, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. Lowrisk projects are evaluated with an 8% project cost of capital and highrisk projects at 13%.
 Develop a spreadsheet model, and use it to find the projects NPV, IRR, and payback.
 Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of units sold. Set these variables values at 10% and 20% above and below their basecase values.
 Now conduct a scenario analysis. Assume that there is a 25% probability that bestcase conditions, with each of the variables discussed in Part b being 20% better than its basecase value, will occur. There is a 25% probability of worstcase conditions, with the variables 20% worse than base, and a 50% probability of basecase conditions.
 If the project appears to be more or less risky than an average project, find its riskadjusted NPV, IRR, and payback.
 On the basis of information in the problem, would you recommend the project should be accepted?
Question 3
You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Each project has a cost of $50,000, and the cost of capital for each is 10%.
The projects expected net cash flows are as follows:

Expected Net Cash Flows 

Year 
Project A 
Project B 
0 
($50,000) 
($50,000) 
1 
25,000 
15,000 
2 
20,000 
15,000 
3 
10,000 
15,000 
4 
5,000 
15,000 
5 
5,000 
15,000 
 Calculate each projects payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI).
 Which project will you select if your decision was based solely on the projects payback period?
 Which project or projects should be accepted if they are independent?
 Which project should be accepted if they are mutually exclusive?
 d. How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if r were 6%? (Hint: Plot the NPV profiles.)
Question 4
Marvin Industries must choose between an electricpowered and a coalpowered forklift machine for its factory. Because both machines perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electricpowered machine will cost more, but it will be less expensive to operate; it will cost $102,000, whereas the coalpowered machine will cost $69,500. The cost of capital that applies to both investments is 10%. The life for both types of machines is estimated to be 6 years, during which time the net cash flows for the electricpowered machine will be $26,150 per year, and those for the coalpowered machine will be $20,000 per year. Annual net cash flows include depreciation expenses.
 Calculate the NPV and IRR for each type of machine, and decide which to recommend
Submit your answers in a Word document.