Finance Week 6 - 1558 Words

Course Project Part II Introduction You will assume that you still work as a financial analyst for AirJet Best Parts, Inc. The company is considering a capital investment in a new machine and you are in charge of making a recommendation on the purchase based on (1) a given rate of return of 15% (Task 4) and (2) the firm’s cost of capital (Task 5). Task 4. Capital Budgeting for a New Machine A few months have now passed and AirJet Best Parts, Inc. is considering the purchase on a new machine that will increase the production of a special component significantly. The anticipated cash flows for the project are as follows: Year 1 $1,100,000 Year 2 $1,450,000 Year 3 $1,300,000 Year 4 $950,000 You have now been tasked with†¦show more content†¦You would also have to assume that the bond would be held until its maturity date and all scheduled payments related to the bond would be made on time. AirJet could also use this method to estimate future return on a bond. d. Explain why you should use the YTM and not the coupon rate as the required return for debt. (5 pts) The coupon rate uses the face value of a bond to compute the bond value. It does not take into consideration the price of the bond at its issue or the redemption value of the bond. As a result, using the coupon rate could cause a large depreciation of funds. 2. Compute the cost of common equity using the CAPM model. For beta, use the average beta of three selected competitors. You may obtain the betas from Yahoo Finance. Assume the risk free rate to be 3% and the market risk premium to be 4%. Betas from Raytheon (0.75), Lockheed Martin (0.64), and Boeing (1.11) create an average of 0.8333. a. What is the cost of common equity? (5 pts) Cost of common equity = Risk free rate + (market risk premium * beta) = 3% + (4% * 0.8333) = .03 + .033332 = .063332 = 6.3332% b. Explain the advantages and disadvantages to use the CAPM model as the method to compute the cost of common equity. Compare and contrast this method with the dividend growth model approach. (10 pts) CAPM Advantages: it is the most relevant way to determine the risk toShow MoreRelatedFin 370 Syllabus Essay examples1359 Words   |  6 Pages | | |Finance for Business | Copyright  © 2012, 2011, 2010, 2008, 2006 by University of Phoenix. All rights reserved. Course Description This course introduces the student to the essential elements of finance for business. Emphasis is placed on financial management, financial markets, and the tools, techniques, and methodologiesRead MoreUniversity of Phoenix Corporate Finance Syllabus1329 Words   |  6 Pages| Syllabus School of Business FIN/571 Version 5 Corporate Finance | Copyright  © 2011, 2010, 2009, 2008 by University of Phoenix. All rights reserved. Course Description This course applies corporate finance concepts to make management decisions. Students learn methods to evaluate financial alternatives and create financial plans. 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