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##### You will assume that you still work as a financial analyst for Good Energy Cereals.

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Introduction;You will assume that you still work as a financial analyst for Good Energy Cereals. The;company is considering a capital investment in a new product line and you are in charge of;making a recommendation on the project.;Task 4. Capital Budgeting;Good Energy has conducted an analysis of the market potential, costs and revenues associated;with its new cereal line, Granola Good Energy.;Here is some information gathered;The project requires an initial investment of $230,000;Years 1-5 would have the following cash flows;Revenues;$188,000;Labor Costs;$60,500;Other Production Cost;$50,750;Depreciation;$15,000;The firm's tax rate is 30%.;Required rate of return 5%.;You have now been tasked with providing a recommendation for the project based on the;results of a Net Present Value Analysis.;1. What is the yearly cash flow for Years 2-5? (5 pts);2. At which rate is the project's net present value equal to zero? (10 pts);3. What is the projects NPV? (10 pts);4. Should the company accept this project based on the NPV rule. Why (or why not)? (5;pts);5. What is the project's payback period in months? (10 pts);6. Provide examples of at least one of the following as it relates to the project: mutually;exclusive investments, erosion costs, forecasting risk. (5 pts each) Note: your examples;should relate to the proposed project.;7. Explain how managerial options would impact your decision regarding the project. What;would be some project-specific risks and market risks related to this project? (20 pts);Task 5: Cost of Capital;Good Energy Cereals. is now considering that the appropriate discount rate for the new product;line should be the cost of capital and would like to determine it. You will assist in the process of;obtaining this rate.;1. Compute the cost of debt. Assume Good Cereals. is considering issuing new bonds.;Select current bonds of Kellogg as a benchmark.;a. What is the YTM of the Kelloggs bond? You may use a number of sources, but;we recommend Morningstar. Find the YTM of one 15 or 20 year bond with the;highest possible creditworthiness. You may assume that new bonds issued by;Good Cereals. are of similar risk and will require the same return. (10 pts);You need to copy and paste your information found here in the form of a;snapshot.;b. Explain what other methods you could have used to find the cost of debt for;Good Cereals. (10 pts);c. Explain how tax laws make the cost of debt higher or lower for Good Cereals.;Given current tax laws, would the company be more or less prone to use debt in;its capital structure? (5 pts);2. Compute the cost of common equity using the CAPM model. For beta, use the current;beta of Kellogg. You may obtain the betas from Yahoo Finance. Assume the risk free rate;to be 5% and the market risk rate to be 8%.;a. What is the cost of common equity? (5 pts);b. How can you use the cost of common equity found above under (a) to compute;the cost of retained earnings? Assuming the company is privately held, would;you expect them to rely more heavily on equity or retained earnings? Explain;your rationale. (10 pts);3. Compute the cost of preferred equity using Kellogg's stock as a benchmark. You can;obtain the current dividend and price information from finance.yahoo.com.;a. What is the cost of preferred equity for Kellogg? (5 pts);b. Is there any other method to compute this cost? Explain. (5 pts);4. Assuming that the market value weights of these capital sources are 20% debt, 50%;common equity and 30% preferred equity, what is the weighted cost of capital of the;firm? (5 pts);5. Should the firm use this WACC for all projects? Explain and provide examples as;appropriate. (5 pts);6. Should the firm use book or market values to compute the cost of capital? Please;explain your rationale. (5 pts);7. Recompute the net present value of the project based on the cost of capital you found.;Do you still believe that your earlier recommendation for accepting or rejecting the;project was adequate? Why or why not? (5 pts)

Paper#28355 | Written in 18-Jul-2015

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