Berry Industries is evaluating four projects for potential inclusion in their 2016 capital budget. The table below contains the cash flows expected for each project. Complete the table for the various capital budgeting methods indicated. Additional information: The companyAc€?cs current financial structure is considered to be optimal Berry is in the 40% marginal tax bracket Berry currently has 25 million shares of common stock outstanding selling for $50 per share. The most recent dividend the stock paid was $3.00, and analysts predict that the company will grow at a constant rate of 9.5% in the future. When estimating the cost of equity using the bond yield plus risk premium approach Berry subjectively adds 7% to the yield to maturity on its existing debt. The following data is relevant for estimating the cost of equity using the Capital Asset Pricing Model (CAPM) rf = 3.5%, Equity risk premium = 10%, BerryAc€?cs beta = 1.4 To estimate the cost of equity, Berry places more weight on the Dividend Discount Model. Consequently, they estimate the cost of equity capital using the following weights: Component Weight Dividend Discount Model 50% Capital Asset Pricing Model 30% Bond Yield plus Risk Premium 20% There are 7,500,000 shares of Berry preferred stock on the market that pays an annual dividend of $7.50 per share. The preferred shares currently sell for $55 each. New Preferred stock will incur a $2.00 per share flotation cost. Berry has $500,000,000 of outstanding debt (book value). The non-callable debt has an 8% coupon rate, pays annual coupon payments, matures in 15 years and is currently priced at 93.4 percent of par value. Berry expects to earn $150,000,000 in net income in the coming year and has a 40% dividend payout ratio. Relevant information for the projects under consideration are in the table below. All cash flows are end of the year cash flows. TIME PROJECT A PROJECT B PROJECT C PROJECT D Initial Cost $25,000,000 $37,500,000 $28,500,000 $30,500,000 Project Life 5 7 3 10 After Tax Cash Flows $7,500,000 $9,000,000 $12,500,000 $6,000,000 Complete the table for the capital budgeting methods indicated and select which projects Berry should pursue Payback IRR NPV MIRR Select Y/N Projects A and B are Mutually exclusive from each other, but independent from projects C and D which are mutually exclusive from each other. ***1. What is BerryAc€?cs expected additions to retained earnings? What is BerryAc€?cs breakpoint for retained earnings (i.e. at what level of new capital will Berry have to issue new common stock and consequently incur flotation cost)?
Berry Industries is evaluating four projects for potential
inclusion in their 2016 capital budget. The table below contains
the
Additional information:
The companyAc€?cs current financial structure is considered to be optimal
Berry is in the 40% marginal tax bracket
Berry currently has 25 million shares of common stock outstanding selling for $50 per share. The most recent dividend the stock paid was $3.00, and analysts predict that the company will grow at a constant rate of 9.5% in the future.
When estimating the
The following data is relevant for estimating the cost of equity
using the
rf = 3.5%, Equity risk premium = 10%, BerryAc€?cs beta = 1.4
To estimate the cost of equity, Berry places more weight on the
|
Component |
Weight |
|
Dividend Discount Model |
50% |
|
Capital Asset Pricing Model |
30% |
|
Bond Yield plus Risk Premium |
20% |
There are 7,500,000 shares of Berry preferred stock on the
market that pays an annual dividend of $7.50 per share. The
Berry has $500,000,000 of outstanding debt (book value). The non-callable debt has an 8% coupon rate, pays annual coupon payments, matures in 15 years and is currently priced at 93.4 percent of par value.
Berry expects to earn $150,000,000 in net income in the coming year and has a 40% dividend payout ratio.
Relevant information for the projects under consideration are in the table below. All cash flows are end of the year cash flows.
|
TIME |
PROJECT A |
PROJECT B |
PROJECT C |
PROJECT D |
|
Initial Cost |
$25,000,000 |
$37,500,000 |
$28,500,000 |
$30,500,000 |
|
Project Life |
5 |
7 |
3 |
10 |
|
After Tax Cash Flows |
$7,500,000 |
$9,000,000 |
$12,500,000 |
$6,000,000 |
|
Complete the table for the capital budgeting methods indicated and select which projects Berry should pursue |
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Payback |
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MIRR |
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Select Y/N |
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Projects A and B are Mutually exclusive from each other, but independent from projects C and D which are mutually exclusive from each other.
***1. What is BerryAc€?cs expected
additions to
What is BerryAc€?cs breakpoint for retained earnings (i.e. at what level of new capital will Berry have to issue new common stock and consequently incur flotation cost)?
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