Management Of Franklin Mints A Confectioner

Management Of Franklin Mints A Confectioner

Management of Franklin Mints, a confectioner, is considering purchasing a new jelly bean-making machine at a cost of $312,515. They project that the cash flows from this investment will be $121,450 for the next seven years. If the appropriate discount rate is 14 percent, what is the IRR that Franklin Mints management can expect on this project? (Round answer to 2 decimal places, e.g., 5.25%).

Hathaway, Inc., a resort company, is refurbishing one of its hotels at a cost of $7,800,000. Management expects that this will lead to additional cash flows of $1,800,000 for the next six years. What is the IRR of this project? If the appropriate cost of capital is 12 percent, should Hathaway go ahead with this project? (Round answer to 2 decimal places, e.g., 5.25%).

Whitewall Tire Co. just paid an annual dividend of $1.60 on its common shares. If Whitewall is expected to increase its annual dividend by 2 percent per year into the foreseeable future and the current price of Whitewall’s common shares is $11.66, what is the cost of common stock for Whitewall? (Round answer to 2 decimal places, e.g., 15.25%).

Seerex Wok Co. is expected to pay a dividend of $1.10 one year from today on its common shares. That dividend is expected to increase by 5 percent every year thereafter. If the price of Seerex common stock is $13.75, what is the cost of its common equity capital? (Round intermediate calculations to 4 decimal places, e.g., 0.5212, and final answer to 2 decimal places, e.g., 15.25%).

Two-Stage Rocket paid an annual dividend of $1.25 yesterday, and it is known that the firm's management expects to increase its dividend by 8 percent for the next two years and by 2 percent thereafter. If the current price of Two-Stage’s common stock is $17.8, what is the cost of common equity capital for the firm? (Do not round intermediate calculations. Round answer to 0 decimal places, e.g., 15%).

Fjord Luxury Liners has preferred shares outstanding that pay an annual dividend equal to $15 per year. If the current price of Fjord preferred shares is $107.14, what is the after-tax cost of preferred stock for Fjord? (Round intermediate calculations to 4 decimal places, e.g., 1.2514, and final answer to 2 decimal places, e.g., 15.25%).

Kresler Autos has preferred shares outstanding that pay annual dividends of $12, and the current price of the shares is $80. What is the after-tax cost of new preferred shares for Kresler if the flotation (issuance) costs for preferred are 5 percent? (Round intermediate calculations to 4 decimal places, e.g., 1.2514, and final answer to 2 decimal places, e.g., 15.25%).

Capital Co. has a capital structure, based on current market values, that consists of 50 percent debt, 10 percent preferred stock, and 40 percent common stock. If the returns required by investors are 8 percent, 10 percent, and 15 percent for the debt, preferred stock, and common stock, respectively, what is Capital’s after-tax WACC? Assume that the firm’s marginal tax rate is 40 percent. (Round intermediate calculations to 4 decimal places, e.g., 1.2514, and final answer to 2 decimal places, e.g., 15.25%).

Paper For Above instruction

The decision-making process involved in evaluating investment projects and understanding a firm’s cost of capital is fundamental in business finance. In this paper, we analyze various financial metrics used for investment appraisal, including the Internal Rate of Return (IRR), cost of equity, cost of preferred stock, and Weighted Average Cost of Capital (WACC). These tools enable firms to assess the profitability and desirability of potential investments, ensuring alignment with strategic financial goals.

Internal Rate of Return (IRR) Calculation

The IRR is a critical metric, representing the discount rate at which the Net Present Value (NPV) of cash flows equals zero. For Franklin Mints’ machine purchase, the cash flows are forecasted at $121,450 annually for seven years, with an initial investment of $312,515. The IRR can be computed using financial calculators or Excel’s IRR function, which yields an IRR of approximately 19.73%. Since this IRR exceeds the firm’s discount rate of 14%, the project appears financially viable.

Similarly, Hathaway’s hotel refurbishment project involves an initial investment of $7,800,000 and expected cash inflows of $1,800,000 annually for six years. Calculating the IRR gives approximately 20.96%. Given that Hathaway’s cost of capital is 12%, and the IRR exceeds this threshold, the project is economically justifiable and should be considered for approval.

Cost of Common Equity

The cost of common equity can be estimated using the Dividend Discount Model (DDM), which considers dividends, growth rates, and stock prices. Whitewall Tire's dividend growth model calculation involves a dividend of $1.60, a growth rate of 2%, and a stock price of $11.66. The cost of equity is:

\[

k_e = \frac{D_1}{P_0} + g = \frac{1.60 \times (1+0.02)}{11.66} + 0.02 \approx 16.70\%

\]

Seerex Wok employs the same model with a dividend of $1.10, a growth rate of 5%, and a stock price of $13.75:

\[

k_e = \frac{1.10 \times (1+0.05)}{13.75} + 0.05 \approx 13.02\%

\]

Two-Stage Dividend Discount Model

Two-Stage Rocket’s stock involves initial high growth, then stabilization. Calculating the present value of dividends during both stages yields an estimated cost of equity of approximately 16.53%.

Cost of Preferred Stock

Preferred stock dividends are paid at a fixed rate, and the cost is calculated as:

\[

k_{ps} = \frac{D_{ps}}{P_{ps}}

\]

For Fjord Luxury Liners:

\[

k_{ps} = \frac{15}{107.14} \approx 14.00\%

\]

For Kresler Autos, considering flotation costs of 5%, net proceeds per share are $76, and the cost becomes:

\[

k_{ps} = \frac{12}{76} \approx 15.79\%

\]

Weighted Average Cost of Capital (WACC)

The WACC combines the costs of debt, preferred stock, and equity weighted by their proportions. With a corporate tax rate of 40%, the after-tax cost of debt is 4.8%. The WACC calculation:

\[

WACC = (0.50 \times 8\%) \times (1 - 0.40) + (0.10 \times 10\%) + (0.40 \times 15\%) \approx 11.40\%

\]

This rate reflects the average cost of capital considering the firm’s capital structure and tax environment, guiding investment decisions aligned with firm’s financial strategy and risk profile.

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