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50 million ordinary shares currently trading at 620p recently declared final dividend of 20p. The...

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Finance

50 million ordinary shares currently trading at 620p recently declared final dividend of 20p. The beta value of the shares is 0.9, the proxy for the risk free rate is 1% and the proxy for the expected return on the market portfolio is 8%.

100 million of 5% bonds currently trading at 114.50 cumulative-interest per 100 nominal. The last annual interest payment was made 6 months ago, redeemable at par in exactly 9 years.

marginal rate of corporation tax is 20% and payments and rebates are subject to a one year delay.

Cap ex available from current year 250,000.

Project A - initial investment = 200,000, Forecast annual profits 12,000, estimated project life 5 years.

Project B - Initial investments 150,000, FAP 29,000, EPL - 6 years.

Calculate the net present value and profitability index of both of the expansion projects and advise the finance director on the optimal amount to invest in each.

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