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FIN B280F Introduction to Financial Management (2020 Autumn) Assignment 2
Due date: 22 December 2020
Weighting: 10% of the total marks for this course
You must use Microsoft Word to prepare the assignments, and submit them via the Online Learning Environment (OLE). All assignments must be uploaded to the OLE by the due date. Failure to upload an assignment to the OLE in the required format may result in the score for the assignment being adjusted to zero.
This assignment consists of 2 questions and carries a total of 100 marks.
Company Marvel has been in the filmmaking industry for quite a while and is specialized in making sci-fi and superhero movies. Due to recent advancement of digital technology and 5G internet, the company decides to set up a subsidiary company (Company Cyrus), which will specialize to focus on the development of filmmaking and internet related technology. This will further improve the company’s comparative advantage in filmmaking industry and capture the latest trend and taste in the younger generation per comment from its CEO.
The total capital requirement of Company Cyrus will be at $30 million in total in marketvalue term in the beginning. Company Marvel decides to finance CompanyCyrus’operations with 40 percent corporate bond, 20 percent of preferred stock and 40 percent common stock. Company Marvel’s current net income is $18 million with a dividend payout ratio of 30%.
Company Marvel currently has outstanding corporate bond of its own for $1 million notional amount in aggregate.The annualcoupon rateof this bond is 8% and it is paid annually.The bond still has 5 years to maturity. The bond is currently traded in the bond market for
$924,184 in aggregate total.
The preferred stock issued by Company Marvel have a perpetuity annual dividend payment of 6% for every $100 notional per share. Preferred stock is currently traded in the market for $75 per share.
Company Marvel’s common stock is currently traded at $60 per share,anditscurrent dividend payout is $5 per share. The dividend is also expected to grow at a constant rate of 10% a year forever. The flotation cost of external equity, if it is issued, is 5% of the dollar amount issued. Assume the tax rate is 25%. (Please show your calculations in all below question from
(a) to (e))
What is Company Marvel’s cost of common stock? What is Company Marvel’s cost of debt?
What is Company Marvel’s cost of preferred stock?
Does Company Marvel need to issue new common stock or not and why?
Estimate Company Cyrus’ Weighted Average Cost of Capital (WACC).
Question 2 (70 Marks)
You have learned five capital budgeting techniques in this course. Describe the details and analyze the limitations of each of these capital budgeting techniques. Also, other than the capital budgeting technique itself, please provide your own views regarding whatother factors which potentially may cause the inaccuracy of capital budgeting results in reality. You need to provide real life examples to illustrate your arguments. (not more than 700 words in total)
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