Required: (a) Assess the viability of these two projects using NPV and Payback period as the appraisal techniques and advise Wonder Plc’s Board of Directors accordingly. (b) Explain the importance of Payback period to the CEO.
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Wonder Plc is considering two investment projects in another city and the
estimated cash flows are as follows:
Year Hotels Housing
£ (m) £ (m)
0 Capital outlay (200) (250)
Net cash flows
1 130 130
2 60 120
3 80 120
4 100 80
4 Residual value 20 40
The company’s cost of capital is 15%.
Required:
(a) Assess the viability of these two projects using NPV and Payback period
as the appraisal techniques and advise Wonder Plc’s Board of Directors
accordingly.
(b) Explain the importance of Payback period to the CEO.
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