Posted: March 6th, 2017
Jorge has asked you to provide detailed responses to the following: •Management of Vanda-Laye has determined that the capital structure of the company will involve 30% debt and 70% common equity. This structure will be used to finance all investments by the company. Currently, the company can sell new bonds at par, with a coupon rate of 7%. Any new common stock can be sold for $45, with a required return (or cost) of 15.57%. Using Microsoft Excel, calculate the company’s cost of capital to be used in the evaluation of possible investment projects. •For Investment A: ◦Using Microsoft Excel, create a decision tree. Indicate the various levels of demand and their respective probabilities. Also, include the calculations for the expected cash flows. ◦Calculate the expected NPV for each alternative. Explain the decision rules for making a selection between the two alternatives on the basis of the expected NPV. ◦Assuming the two alternatives are mutually exclusive, specify which alternative you would recommend to the company. Explain why. ◦If the two alternatives were independent of each other, specify which project you would select. Would you accept both projects if funding were available for both? Explain your answer. •For Investment B: ◦Using Microsoft Excel, calculate the NPV for each alternative. ◦Using the decision-making criteria for the NPV, specify which alternative you would select if the two alternatives were mutually exclusive. Explain your answer. ◦Given that the two alternatives are independent of each other, specify which investment you would select, if not both. Explain your answer. ◦Using Microsoft Excel, calculate the IRR for each investment. ◦Using the decision-making criteria for the IRR, specify which alternative you would prefer. Explain your answer. ◦If funding were available, specify whether you would select both investments. Why or why not? ◦Calculate the profitability index (PI) for the two investments. Which project is preferred? ◦Determine whether there is a ranking conflict present in terms of the IRR and the NPV. Explain your answer. If a conflict does exist, explain how you would resolve the situation.
Submission Details: •Compile a report including all your responses from Weeks 1, 3, and 5. Make sure your report reads as one report rather than three reports pasted together. Complete all revisions suggested by your instructor in previous weeks. Make sure all responses are complete and accurate, supported by references and documented examples. The report should be 10–15 pages in length and include an executive summary. •Name the spreadsheet as SU_MBA5004_W5_A2_LastName_FirstInitial.xls and your Microsoft Word document as SU_MBA5004_W5_A2_LastName_FirstInitial.doc
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