Case Two (22 pts) Given the following information for Bajor Co.: Debt: Bajor’s long-term debt capital consists...

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Case Two (22 pts) Given the following information for BajorCo.:
Debt: Bajor’s long-term debt capital consists of bonds with6.250 percent coupon rate (semiannual coupon payments), 9 yearstime-to-maturity, and current price of 106.61 percent of its parvalue (i.e., price = 106.61 relative to full amount redemption parof 100).
Preferred stock: Bajor has not issued any preferred stocks.
Common stock (equity): ? Bajor’s equity capital consists ofcommon stocks with the most recent annual dividend of $0.92 pershare, and a current stock price of $14 per share. ? According toonline data sources, Bajor’s long-term dividend growth (for next5-Year average, per annum) g = 4.5% per year. ? The “risk-free”Treasury bill return is 3.8%; the market expected return for thestock market on average is 12.3%; and Bajor’s systematic risk(Beta) is 0.71.
Taxes: The applicable federal-plus-state corporate tax rate forBajor is 25.7 percent.
Capital weight: Bajor’s “Market Cap” amounts to $18.23 billion,and “Total Debt” amounts to $14.44 billion. You can use such datato estimate the capital weights for equity and debt, respectively(We and Wd).
Time constraint: For any investment projects, Bajor are requiredby her investors to recover its initial cost within no more than 6years.
Q1: What is Bajor’s pretax cost of debt Rd, cost of equity Re,and WACC, respectively? (Hint: For the best estimate of cost ofequity Re, you must apply both CAPM and Dividend Growth Model andthen average the two estimates.)
Q2: There are three investment projects available to Bajor:Project A costs $12 million to invest today, and then provides“cash inflow from assets” of $2.50 million per year for the next 7years. Project B costs $18 million to invest today, and thenprovides “cash inflow from assets” of $3.30 million per year forthe next 8 years. Project C costs $30 million to invest today, andthen provides “cash inflow from assets” of $4.25 million per yearfor the next 10 years.
If Projects A, B & C are mutually exclusive, whichproject(s) should Bajor accept? (You must apply the three majorinvestment evaluation rules NPV, IRR and Payback)
Q3: If Projects A, B & C are independent, which project(s)should Bajor accept? (You must apply the three major investmentevaluation rules NPV, IRR and Payback)

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3.7 Ratings (415 Votes)

Q 1 Semi annual yield RATE Period PMT PV FV RATE 2 x 9 6252 x 100 10661 100 26582 Hence pre tax cost of debt Rd Annual yield 2 x semi annual yield 2 x 26582 532 Common stock Cost of equity using CAPM risk free rate Beta x market risk premium 38 071 x See Answer

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Case Two (22 pts) Given the following information for BajorCo.:Debt: Bajor’s long-term debt capital consists of bonds with6.250 percent coupon rate (semiannual coupon payments), 9 yearstime-to-maturity, and current price of 106.61 percent of its parvalue (i.e., price = 106.61 relative to full amount redemption parof 100).Preferred stock: Bajor has not issued any preferred stocks.Common stock (equity): ? Bajor’s equity capital consists ofcommon stocks with the most recent annual dividend of $0.92 pershare, and a current stock price of $14 per share. ? According toonline data sources, Bajor’s long-term dividend growth (for next5-Year average, per annum) g = 4.5% per year. ? The “risk-free”Treasury bill return is 3.8%; the market expected return for thestock market on average is 12.3%; and Bajor’s systematic risk(Beta) is 0.71.Taxes: The applicable federal-plus-state corporate tax rate forBajor is 25.7 percent.Capital weight: Bajor’s “Market Cap” amounts to $18.23 billion,and “Total Debt” amounts to $14.44 billion. You can use such datato estimate the capital weights for equity and debt, respectively(We and Wd).Time constraint: For any investment projects, Bajor are requiredby her investors to recover its initial cost within no more than 6years.Q1: What is Bajor’s pretax cost of debt Rd, cost of equity Re,and WACC, respectively? (Hint: For the best estimate of cost ofequity Re, you must apply both CAPM and Dividend Growth Model andthen average the two estimates.)Q2: There are three investment projects available to Bajor:Project A costs $12 million to invest today, and then provides“cash inflow from assets” of $2.50 million per year for the next 7years. Project B costs $18 million to invest today, and thenprovides “cash inflow from assets” of $3.30 million per year forthe next 8 years. Project C costs $30 million to invest today, andthen provides “cash inflow from assets” of $4.25 million per yearfor the next 10 years.If Projects A, B & C are mutually exclusive, whichproject(s) should Bajor accept? (You must apply the three majorinvestment evaluation rules NPV, IRR and Payback)Q3: If Projects A, B & C are independent, which project(s)should Bajor accept? (You must apply the three major investmentevaluation rules NPV, IRR and Payback)