Walsh Company is considering three independent projects, each of which requires a $3 million investment. The estimated internal rate of return (IRR) and cost of capital for theseprojects are presented here:Project H (high risk):Cost of capitalProject M (medium risk):Project L (low risk):Cost of capitalCost of capital= 15%= 11%= 8%IRR = 19%IRR = 12%IRR = 7%Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 50% debt and 50% common equity,and it expects to have net income of $4,443,000. If Walsh establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimalplaces.%

The residual dividend model is a theory used by companies to determine dividend payments based on…

Answered: Walsh Company is considering three…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Nile Inc. wants to choose the bettter of two mutually exclusive projects that expand warehouse capacity. The projects cash flows are shown in the following table attached. The cost of capital is 14% a. Calculate the IRR for each of the projects . Assess the acceptabiity of each project on the basis of the IRRs. b. Which project is preferred?
There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $34,927 and is expected to generate the following cash flows: First Year Second Year Third Year Total Alpha Project $32,500 $22,500 $4,500 $59,500 Beta Project 7,000 23,500 27,904 58,404 A. Calculate the internal rate of return on both projects. Use the IRR spreadsheet function to calculate internal rate of return. Alpha Project fill in the blank % Beta Project fill in the blank % B. Make a recommendation on which one to accept.
Lopez Industries has identified the following two mutually exclusive capital investment projects: Year Project A Project B 0 -16000 -15500 1 400 12500 2 800 8000 3 13000 800 4 14000 800 If the required return is 11%, what is the NPV for each of these projects? Which project should the firm accept if they apply the NPV rule?
Yokam Company is considering two alternative projects. Project 1 requires an initial investment of $420,000 and has a present value of all its cash flows of $1,350,000. Project 2 requires an initial investment of $5 million and has a present value of all its cash flows of $6 million. (a) Compute the profitability index for each project.(b) Based on the profitability index, which project should the company select?
The management of FICSIT Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows:YearWind TurbinesBiofuel Equipment1$270,000$300,5002270,000300,5003270,000300,5004270,000300,500The wind turbines require an investment of $877,600, while the biofuel equipment requires an investment of $910,000. No residual value is expected from either project.Problem 2 Instructions a. Determine the internal rate of return for each project by:i. computing a present value factor for an annuity of $1 and ii. using the present value of an annuity of $1 table appearing in this chapter (Exhibit 5).
The Iggy Company is considering three capital expenditure projects. Relevant data on each project are as follows: Project A Investment -275,000 Year 1 $40,000 Year 2 56,000 Year 3 80,295 Year 4 90,400 Year 5 55,000 Year 6 50,000 Year 7 45,000 Year 8 32,000 Project B Investment -275,000 Year 1 $72,000 Year 2 50,000 Year 3 66,000 Year 4 72,000 Year 5 29,000 Year 6 35,000 Year 7 22,000 Year 8 36,000 Project C Investment -275,000 Year 1 $82,000 Year 2 75,000 Year 3 65,000 Year 4 55,000 Year 5 45,000 Year 6 35,000 Year 7 25,000 Year 8 15,000 Required: Compute the Payback Period for each project.…
E Over-the-Top Canopies (OTC) is evaluating two independent investments. Project S costs $170,000 and has an IRR equal to 9 percent, and Project L costs $160,000 and has an IRR equal to 7 percent. OTC's capital structure consists of 20 percent debt and 80 percent common equity, and its component costs of capital are rat = 4%, rs = 11%, and re = 14.5%. If OTC expects to generate $260,000 in retained earnings this year, which project(s) should be purchased? Round your answers to one decimal place. Project S L eBook Thus, -Select- WACC % % Acceptable? -Select- ✓ -Select- should be purchased. Grade it Now Save & Continue Continue without saving
Consider a project that will produce sales of $55,150 and have costs of $31,100. Taxes will be $5,400 and the depreciation expense will be $3,325. An initial cash outlay of $2,250 is required for net working capital. What is the project's operating cash flow?
Over-the-Top Canopies (OTC) is evaluating two independent investments. Project 5 costs $150,000 and has an IRR equal to 13 percent, and Project L costs $140,000 and has an IRR equal to 11 percent. OTC's capital structure consists of 20 percent debt and 80 percent common equity, and its component costs of capital are far = 3%, rs = 11%, and re = 12.5%. If OTC expects to generate $220,000 in retained earnings this year, which project(s) should be purchased? Round your answers to one decimal place. Acceptable? Project S L Thus, -Select- WACC % % should be purchased, -Select- -Select-
Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 12%. project 1 project 2 initial investment $(510,000) $(685,000) cash flow year 1 485,000 610,000 Compute the following for each project: NPV (net present value) PI (profitability index) IRR (internal rate of return) Based on your analysis, answer the following questions : Which is the best choice? Why? Which project should be selected and why? If the projects had the same IRR amounts but different NPV totals, then how would you know which project to select? Explain.
Consider the following projects, X and Y where the firm can only choose one. Project X costs $1500 and has cash flows of $678, $652, $347, $111, $54, $16 in each of the next 6 years. Project Y also costs $1500, and generates cash flows of $738, $693, $405 for the next 3 years, respectively. WACC=11%.Plot NPV profiles for the two projects. Identify the projects’ IRRs on the graph.
Weston Systems is considering the following independent projects for the coming year: Project Required Investment Expected Rate of Return Risk X $8 million 12.5% High Y 8 million 9.5% Average Z 3 million 5.5% Low Weston’s WACC is 9 percent, but it adjusts for risk by adding 2 percent to the WACC for high-risk projects and subtracting 2 percent for low-risk projects. What would be the minimum acceptable return for each of the three projects? Which project(s) should Weston accept assuming it faces no capital constraints?

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