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FIN200 – Managerial Finance

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Fall2020

Project Deliverable 1 – Group Work (10 %)

V1

Name ID

PROJECT TITLE: Project Cost of Capital

PROJECT OBJECTIVE:

The objective of the project is to help students visualize the decision-making process behind

choosing a corporate project based on fundamental capital budgeting techniques learnt throughout the

course incorporating and linking five basic concepts in finance: Time Value of Money, Cost of Capital,

Capital Budgeting, Stocks Valuation and Bonds Valuation. It will give students the chance of the application

of the basic concepts in finance, as well as interlinking most of the chapters in the course.

PROJECT GUIDELINE:

During the last few years, Harry Davis Industries has been too constrained by the high cost

of capital to make many capital investments. Recently, thought, capital costs have been

declining, and the company has decided to look seriously at a major expansion program

proposed by the marketing department.

Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task

is to estimate Harry Davis’s cost of capital. Jones has provided you with the following data,

which she believes may be relevant to your task.

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a) The current price of Harry Davis’s 10 % coupon with semi-annual payment, with 15

years remaining to maturity is $3000. New bonds can be issued with $3000 face value.

The cost of debt is 1%. The firm’s tax rate is 35 %.

b) The current price for preferred shares in the market is $170 and the perpetual annual

dividend is $50.

c) Harry Davis’s common shares are currently selling at $35 per share, its last dividend (D0) was $5, and dividends are expected to grow at a constant rate of 3 % in the foreseeable future.

d) Harry Davis’s capital structure is 40 % long-term debt, 30 % preferred stock and 30 %

common stock.

Requirements

1. Mention the two ways that companies can raise common equity? (20 points)

2. Why does cost of capital play an important role in decision-making? (10 points)

3. Determine the Cost of Preferred Stock – rp. (15 point)

4. Determine the cost of Common Stock – rs. (20 point)

5. Calculate the WACC. (25 point)

6. When it comes to the return on invested capital and cost of capital, when should a company

accept or reject a project? (10 points)

Bonus Question: Which of the source of funds has the highest risk and explain why? (5 p.

Copyrights ©American College of the Middle East, 2020

Grading Rubric

Category

Scoring Criteria

Total

Points

Score

Mention the two ways that companies can

raise common equity? 20

Content

(100 points)

Why does cost of capital play an important role in decision-making

10

Calculate Cost of Preferred Stock 15

Calculate Cost of Common Stock 20

Calculate WACC 25

When it comes to the return on invested

capital and cost of capital, when should a

company accept or reject a project

10

Bonus: Which of the source of funds has the

highest risk and explain why? 5

Total Points 100

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