Answer Happy

Part 1: Calculate the company’s Weighted Average Cost of Capital
(30 marks)
a) Calculate the before-tax cost of bank loans, mortgage loans,
and corporate bonds (6 marks).
b) Calculate the (market) value of bank loans, mortgage loans,
and corporate bonds (6 marks).
c) Calculate the cost of ordinary shares and preference shares
(6 marks).
d) Calculate the market prices of ordinary shares and preference
shares (4 marks).
e) Calculate the total market values of ordinary shares and
preference shares (4 marks).
f) Calculate the company’s WACC (4 marks).
Part 3: Calculate the project’s NPV, Payback Period, and
Profitability Index (20 marks)
a) Calculate NPV, Payback Period, and Profitability Index (10
marks)
b) Should the project be accepted? Explain your answer (10
marks).
Your team of three works in the Finance division of the Carlton Manufacturing Company Ltd. The company is in the process of deciding whether or not to purchase a new plastic injection machine. Your company's Chief Financial Officer has asked you to make a recommendation as to whether a or not the company should proceed with the project based on the following information: A. Balance sheet and notes Carlton Manufacturing Company Ltd Balance Sheet as at 31/12/21 ASSETS LIABILITIES Notes Cash 140 120 Accounts Receivable 200 1 240 Accounts payable Bank loan (interest only) Mortgage Loan Corporate bonds 2 530 Inventory 610 Property, plant & equipment 1,200 3 300 Total Assets 2,150 Total liabilities 1,190 SHAREHOLDERS' EQUITY Ordinary shares Preference Shares 4 430 5 250 280 Retained earnings Total shareholders' equity 960 Total liabilities and shareholders' equity 2,150 Notes 1. The interest rate on the bank loan is 8.2% p.a. 2. The interest rate on the mortgage loan is 5.9% p.a. 3. The corporate bonds have a credit rating of AA and have 2 years to maturity. They make quarterly coupon payments at a coupon rate of 7% p.a.
C. Project Information . O The equipment will cost $720, is expected to have a working life of 4 years, and will be depreciated on a diminishing-value basis to a book value of zero. The equipment is expected to have a salvage value of $120 at the end of 4 years. The new equipment will improve efficiency and result in increased revenue of $850 in its first year of operation, but because of reduced efficiency from normal wear and tear, revenue will decrease by 4% (from the previous year's revenue) for each of the remaining 3 years of the equipment's life. Excluding maintenance, all other costs from operating the equipment will be $280 per year. Maintenance costs will amount to $120 in the equipment's first year of operation and will then increase by $30 per year for the remaining 3 years of the equipment’s life. The equipment will require additional net working capital of $200. The net working capital will be recovered in full after the equipment is sold at the end of its working life. The equipment will be installed a building that is owned by the company but currently is not being used. If the project does not proceed, this building could be rented out for $200 per year. A feasibility study has been undertaken on the purchase of the new equipment. The cost of preparing the feasibility study was $400. The company has sufficient capital to undertake all positive-NPV projects. If the Payback Period method is used to evaluate projects, management's policy is that the maximum acceptable payback period is 3 years, and all cash flows in Year 0 would need to be recovered within 3 years for the project to be acceptable under this method.