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1. Nominal cost of debt should be used for capital budgeting cash flows as they are assumed to occur at year end, making it more consistent. 2. The cost of capital new should be used, not historical cost of capital, as we need to know the cost of acquiring new capital for a project. 3. COVID-19 pandemic impacted corporations' cash conversion cycles differently - some saw increases while others saw decreases, depending on factors like whether they were local or international firms.

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44 views3 pages

Non-Anonymous Question

1. Nominal cost of debt should be used for capital budgeting cash flows as they are assumed to occur at year end, making it more consistent. 2. The cost of capital new should be used, not historical cost of capital, as we need to know the cost of acquiring new capital for a project. 3. COVID-19 pandemic impacted corporations' cash conversion cycles differently - some saw increases while others saw decreases, depending on factors like whether they were local or international firms.

Uploaded by

Syed Ijlal Haider
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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1.Should one use the nominal cost of debt or the effective annual cost?

Reason
why.

Capital budgeting cash flows are generally assumed to occur at year end
therefore nominal cost of debt are used to make it look it more consistent.

2.Cost of Capital historical vs new, which one should be utilized. Discuss with
reference to your assignment.

Cost of Capital New should be used.

For example, would a new machine earn a return greater than the
cost of the capital needed to acquire the machine?
The rate at which the firm has borrowed in the past is irrelevant when answering
this question because we need to know the cost of new capital. For these
reasons, the yield to maturity on outstanding debt (which reflects current market
conditions) is a better measure of the cost of debt than the coupon rate. (pg 362)

3.How did COVID-19 pandemic moved the CCC for majority of corporations.
Compare similarities and/or differences of local vs. international firms.

4.What is the market interest rate on debt and its component cost of debt for as
bond of 15 years maturity with a coupon rate of 12% paid on a quarterly basis.
Bond is currently selling at $1,153.72. Show your computations.

5.A firm has a capital structure consisting of 25% debt and 75% equity. It’s debt
currently has a 7% yield to maturity. The risk-free rate (rRF) is 6%, and the market
risk premium (rM – rRF) is 7%. Using the CAPM, Forever estimates that its cost of
equity is currently 14.5%. The company has a 40% tax rate. Compute WACC,
current beta, beta if firm had zero debt. Attach your step wise computation of
above-mentioned values in your own hand writing (neatly written & legibly
scanned jpeg on a an A4 sized paper, you have loads to time to do that).
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6.Comment on the values of both Betas computed in one of the numerical.

- Levered beta is higher due to risk related to debt component.


- As debt is reduced, risk spread decreases.
- Unlevered beta is the least risky hence lower value

7.Comment on the last dividend paid by Aramco in terms of dividend policy


theory perspective. Make relevant comments as per class discussion.

https://www.bloomberg.com/opinion/articles/2020-06-28/saudi-aramco-s-dividend-math-doesn-t-add-
up-considering-oil-price?fbclid=IwAR0AOuIiUlRwtC3vq9Zud1oS3cEC_iPXVR6x-Qy5FucfjtkH-R9bcn4E_cI

8.What is the whole point of MM irrelevancy theories, discuss.

To highlight more importance of other financial theories.

In reality, no assumptions stand true.

Theoretically true, practically incorrect.

9.Evaluate a proposal to buy a new milling machine. The base price is $135,000
and shipping and installation costs would add another $8,000. The machine falls
into the MACRS 3-year class, and it would be sold after 3 years for $94,500. The
applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would
require a $5,000 increase in net operating working capital (increased inventory
less increased accounts payable). There would be no effect on revenues, but
pretax labor costs would decline by $52,000 per year. The marginal tax rate is
35%, and the WACC is 8%. Also, the firm spent $4,500 last year investigating the
feasibility of using the machine. Mention initial investment outlay for the machine
for capital budgeting purposes, annual cash flows during Years 1, 2, and 3. What's
the decision? Attach your step wise computation of above-mentioned values in
your own hand writing (neatly written on a an A4 sized paper & legibly scanned
jpeg , you have loads to time to do that).
(Non-anonymous question )
Your name and file upload actions will be recorded in SharePoint and visible to the form owner.
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10.Discuss the various trade-offs that companies face when trying to establish
their optimal dividend policy.
(2 Points)

Various trade offs that firms face while trying to establish their optimal dividend policy are:

1)Excess cash: if the firm has excess cash in hand and has no upcoming investment projects then it can
pay it out to shareholder. On the other hand it could be used to repurchase stock, if this is a one time
phenomenon the company has to consider future financing needs.

2)The bird in hand fallacy: Dividends now are more certain than capital gains later. Hence stocks with a
consistent dividend history are valued higher. On the other hand the comparison should be between the
amount of dividend now and the amount of expected capital gain/upside after the ex dividend.

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