01 May Statistical Analysis, Capital Budgeting, and Risk Analysis
eneral Comments: Please use your own words and document resources used in answering all of the following questions. To answer the questions, just expand the area under the questions in this document. With the empirical work please copy or past it into the document or embed the answers in the Word document. Also remember to write your name on the document. The document should be submitted to the Assignment folder under LE 1. A Reading List will also be provided in the assignment section under the LE 1 folder. Don’t worry about getting the exact answer for all of the questions, it is a learning process. I would like you to solve the problems using the formulas to insure that you understand the process.
Statistical Analysis, Capital Budgeting, and Risk Analysis
Introduction:
Learning exercise 1 will serve as an introduction to statistical analysis and introduce the basics of corporate finance including capital budgeting models, bond and stock valuation, and risk analysis. This learning exercise will use data from the Wharton Database to perform specific statistical analysis using Excel.
1) Using the following information determine the NPV, Profitability Index, and IRR of the following project. For simplicity assume that the company only has debt and equity and all of the company’s debt is in 15 year bonds. Would the company move forward with the project? Please explain.
Data: Price of 15-year bond is $1,075, face value of the bond is $1,000, and the coupon rate is 5.35% and the coupon payments are paid annually.
The EPS of the company is $9.76, the dividend payout ratio is 32%, and the stock price is $67.89 (Assume a constant growth model)
Assume the debt equity ratio is .35
The Net Cash Outlay (NCO) of the project is – $18,750, 000
After tax cash flows for year 1 = – $2,278,000
After tax cash flows for year 2 = $4,790,000
After tax cash flows for year 3 = $5,987,000
After tax cash flows for year 4 = $6,350,000
After tax cash flows for year 5 = $8,145,000
Corporate Tax of 23 %.
If you can’t solve for the cost of capital, assume that the cost of capital is 10% so you will be able to move forward with the problem.
B) Please discuss the advantages and disadvantages to the NPV model, IRR model, and the profitability index.
2) A) Using the Gordon constant growth model for stock valuation determine the price of the stock assuming that:
EPS 1 = $7.45
Ke = 11.56%
Dividend Payout Ratio (DPR) = 28%
What happens to the price of the stock if the DPR is changed to 34%? What happens to the price of the stock if the DPR is 100%? What rate do you think retained earnings should be invested at in the Gordon model? Can growth
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