Question

You should make original posts discussing any three of the following statements. You are also required to post at least three responses to other student’s posts. Please note that this is a minimum requirement. Your grade will be a function of your effort. Please i need a solution on three of 8 topics below. Thank you

1. If you were evaluating an investment opportunity, which technique would you use and why?

2. When evaluating investments, you can get data from engineering, marketing and sometimes accounting. Do you think any of these organizations have internal biases? If so, as a member of the finance department, how would you deal with them?

3. You have just discovered that your boss favors payback in evaluating investments. Should you try to talk him out of it or should you go along with his/her desires?

4. You are comptroller for your company. The CEO is a savvy individual with great instincts for the business. She strongly favors an investment that is only marginally acceptable at best. She has asked you to put together justification for it. What will you do?

5. Last year your company financed its investments by selling shares of common stock. This year the plan is to use debt. The after tax cost of debt is 5%, the cost of equity is 12% and the weighted average cost of capital is 9.5%. The first investment for this year is an expansion project. What cost of capital will you use and why?

6. The weighted average cost of capital can consist of debt, preferred stock and equity. Which of these sources is the most expensive and the least expensive and why?

7. Young companies usually finance their assets with equity. Why?

8. Equity financing can come from external or internal sources. Which of these is the least expensive and why?

Answer 1

1. NPV becauae NPV considers time value of money, considers all cash flows, riskiness of the project- required return or cost of capital and is consistent with shareholder wealth maximization.

3. We should try to talk him out of using payback. Payback method does not consider time value of money, dies not consoder riskiness of the project, ignores all cash flows beyond payback period.

5. Least expensive: Debt because they are guaranteed fixed payments in the form of interest regardless of company's peeformance. As it is very less risky, the investors are happy with low cost of funds.

Most expensive: Equity because they are not guaranteed any fixed payments. Sometimes they get payment in the form of dividends and sometimes they don't. To compensate for this risk, this source of capital demands highest cost of funds.

answered by: anonymous