23 Jun The company uses the historical differenc
The company uses the historical difference in returns between the S&P 500 and the Treasury bond rates of 7% as their estimated market risk premium. The current yield to maturity on a 10-year Treasury bond is 6.2%. Airvalue Airways common-stock equity beta is estimated as 1.40.
Airvalues capital structure is 58% common stock, 32% preferred stock and 10% long-term debt. An 8.8% after tax cost of debt has been determined and the cost of preferred stock is 12%.
Your task is to:
Describe for other members of the strategic planning committee the role that capital budgeting should play in corporate strategic management.
Explain why the NPV and IRR capital budgeting tools are superior to the accounting rate of return and simple payback techniques for determining the attractiveness of capital investment opportunities.
Use the Capital Asset Pricing Model (CAPM) to identify the cost of common stock.
Calculate the weighted average cost of capital (WACC) for the firms existing capital structure.
Calculate the net present value (NPV) for each plane model using the companys WACC as the hurdle rate.
Recommend which plane should be purchased and justify your recommendation.
Discuss the need to manage implementation of the project so that the higher returns can be realized. Include the strategic management keys to protecting the project from competitive forces that would erode the earning power of the project and jeopardize realization of the projected rate of return on the investment.
To complete this assignment, you must submit a 6-8 page paper that addresses the seven elements of the task as listed above and exhibits your calculations of the cost of common stock, the weighted average cost of capital, and the NPV for each plane along with an explanation of the calculations.
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