Financial Management Unit VIII Assignment

1. The Turnip Company plans to issue preferred stock. Currently, the company’s stock sells for $110. Once new stock is issued, the Turnip Company would receive only $90. The dividend rate is 8%, and the par value of the stock is $100. Compute the cost of capital of the stock to your firm. Show all work.

2. The Maximus Corporation is considering a new investment, which would be financed from debt. Maximus could sell new $1,000 par value bonds at a new price of $920. The bonds would mature in 13 years, and the coupon interest rate is 10%. Compute the after-tax cost of capital to Maximus for bonds, assuming a 34% tax rate. Show work.

3. Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 10%.

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.

·        What would happen if both projects had negative NPV totals? Which project would you choose? What do negative NPVs indicate? Explain.

·        Should we also use the payback method to assist us in project selection? Why or why not? Explain.