Companies make capital budgeting decisions based on the expected profitability of a project. Companies must also make financing decisions.
accounting
Description
Companies make capital
budgeting decisions based on the expected profitability of a project. Companies must also make financing decisions.
The investing and financing decisions, although related, are independent of one
another. For purposes of this phase of
the Comprehensive Project, assume the capital project analyzed last week has
been undertaken. Remember, the cost of the project is 2% (rounded to nearest
$00 million) of the company’s total assets.
You are considering five
possible financing options:
Retained Earnings: Paying for the project with existing
resources; the cost of this option is the opportunity cost of the next best
option…in this case, the foregone interest of 4% determined last week.
Five-Year, 5% Note
Payable: The face-value of the note will
be equal to the cost of the project; the note will bear interest at 5%;
repayment of the note principal is due at the end of 5 years with the last
interest payment
Ten Year; 8% Bond
Issue: The bonds will be issued at par
with a face value equal to the cost of the project. One tenth of the bond principal will be
retired each year along with the annual interest payment.
6% Preferred Stock:
Preferred Stock with a total par value equal to the cost of the project will be
issued; the stock pays an annual dividend of 6%.
Issue of Common
Stock: Common stock will be issued at
par for a total value equal to the cost of the project.
Quantify the cost of each
alternative on the Week 6 tab of the CP file.
Submit a 3-4 page (double
spaced) summary (MAX) of the pros and cons of the different methods for
financing the project. Include both qualitative and quantitative
considerations. Consider the impact of your analysis on relevant ratios of your
selected company. Which of the financing options would you recommend?
