Copyrights ©American College of the Middle East, 2020
FIN200 – Managerial Finance
Fall2020
Project Deliverable 1 – Group Work (10 %)
V1
Name ID
PROJECT TITLE: Project Cost of Capital
PROJECT OBJECTIVE:
The objective of the project is to help students visualize the decision-making process behind
choosing a corporate project based on fundamental capital budgeting techniques learnt throughout the
course incorporating and linking five basic concepts in finance: Time Value of Money, Cost of Capital,
Capital Budgeting, Stocks Valuation and Bonds Valuation. It will give students the chance of the application
of the basic concepts in finance, as well as interlinking most of the chapters in the course.
PROJECT GUIDELINE:
During the last few years, Harry Davis Industries has been too constrained by the high cost
of capital to make many capital investments. Recently, thought, capital costs have been
declining, and the company has decided to look seriously at a major expansion program
proposed by the marketing department.
Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task
is to estimate Harry Davis’s cost of capital. Jones has provided you with the following data,
which she believes may be relevant to your task.
Copyrights ©American College of the Middle East, 2020
a) The current price of Harry Davis’s 10 % coupon with semi-annual payment, with 15
years remaining to maturity is $3000. New bonds can be issued with $3000 face value.
The cost of debt is 1%. The firm’s tax rate is 35 %.
b) The current price for preferred shares in the market is $170 and the perpetual annual
dividend is $50.
c) Harry Davis’s common shares are currently selling at $35 per share, its last dividend (D0)
was $5, and dividends are expected to grow at a constant rate of 3 % in the foreseeable
future.
d) Harry Davis’s capital structure is 40 % long-term debt, 30 % preferred stock and 30 %
common stock.
Requirements
1. Mention the two ways that companies can raise common equity? (20 points)
2. Why does cost of capital play an important role in decision-making?
(10 points)
3. Determine the Cost of Preferred Stock – rp. (15 point)
4. Determine the cost of Common Stock – rs. (20 point)
5. Calculate the WACC. (25 point)
6. When it comes to the return on invested capital and cost of capital, when should a company
accept or reject a project? (10 points)
Bonus Question: Which of the source of funds has the highest risk and explain why? (5 p.
Copyrights ©American College of the Middle East, 2020
Grading Rubric
Category
Scoring Criteria
Total
Points
Score
Mention the two ways that companies can
raise common equity?
20
Content
(100 points)
Why does cost of capital play an important
role in decision-making
10
Calculate Cost of Preferred Stock 15
Calculate Cost of Common Stock 20
Calculate WACC 25
When it comes to the return on invested
capital and cost of capital, when should a
company accept or reject a project
10
Bonus: Which of the source of funds has the
highest risk and explain why?
5
Total Points 100
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