The percentage of capital structure for ZEF Incorporated is provided here: Capital structure Weighted Bond 21% Preferred stock 5% Common stock 74% The firm is in a 25% tax bracket and plans to maintain its capital structure in the future. The firms cost of debt before tax is 13%. The cost of preferred stock is 17%. The common stock market price is RM22.50. The company’s executive anticipates a dividend constant growth rate of 7% and dividend for this year is expected to be RM2.30. To issue the new common stock, company will incur a floatation cost of RM2.50. ZEF Incorporated is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects—M and N. The relevant cash flows for each project are shown in the following table. The firm’s cost of capital is based on answer in question a) above Project M (RM) Project N (RM) Initial Investment (RM) 28,500 27,000 Year Cash Flow (RM) 1 10,000 11,000 2 10,000 10,000 3 10,000 9,000 4 10,000 8,000 c. Calculate the net present value (NPV) for each project d. Calculate the profitability index (PI) for each project
The percentage of capital structure for ZEF Incorporated is provided here:
|
Capital structure |
Weighted |
|
Bond |
21% |
|
|
5% |
|
Common stock |
74% |
The firm is in a 25% tax bracket and plans to maintain its capital structure in the future. The firms cost of debt before tax is 13%. The cost of preferred stock is 17%.
The common stock market price is RM22.50. The company’s executive anticipates a dividend constant growth rate of 7% and dividend for this year is expected to be RM2.30. To issue the new common stock, company will incur a floatation cost of RM2.50.
ZEF Incorporated is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects—M and N. The relevant cash flows for each project are shown in the following table. The firm’s cost of capital is based on answer in question
a) above
|
|
Project M (RM) |
Project N (RM) |
|
Initial Investment (RM) |
28,500 |
27,000 |
|
Year |
Cash Flow (RM) |
|
|
1 |
10,000 |
11,000 |
|
2 |
10,000 |
10,000 |
|
3 |
10,000 |
9,000 |
|
4 |
10,000 |
8,000 |
c. Calculate the
d. Calculate the profitability index (PI) for each project
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