Case - Atlas Metals Company Capital Budgeting
QUESTIONS 1. Explain why Jim Brakeman's method of monitoring project managers' ROIs may have con-tributed to an increase in the company's ROI. Then explain why this procedure may not maximize the company's value. Also explain the bene?ts and detriments of using simple payback to allocate funds.
2. Explain the appropriate use of short-term debt (such as notes payable) and of spontaneously generated capital (such as accruals and accounts payable) for determining the company's capital structure.
3. Linda believes that Atlas Metals's present market capital structure is optimal, that is, it mini-mizes the ?rm's weighted average cost of capital and maximizes the stock price. Calculate Atlas Metals's market value capital structure. (Round your numbers to the nearest whole percentage.)
4. Determine the break points in the marginal cost of capital curve. Assume that the current Ccapital structure is maintained, the dividend payout ratio remains at 37 percent, depreciation charges are $8,249,000, and 1998 earnings of $ 29,587,000 are available to common share- holders in 1999.
5. Find the weighted average cost of capital (WACC) for each interval of the marginal cost of capital curve (MCC) and graph the curve. Recall that Atlas Metals's marginal tax rate is 40 percent, and the equity return is based in part on the current price of the stock, the expected dividend (D ) from 1998 EPS, and the 30 percent payout ratio.
6. Consider the cost and bene?ts of the rapid prototyping (RP) device in answering the follow- ing questions.
a. Determine the internal rate of return for projects A and B.
b. Graph the investment opportunity schedule and the marginal cost of capital schedule.
c. Based on this information, what is the company's marginal cost of capital, and which project should be accepted?
7. Linda believes the modi?ed internal rate of return (MIRR) is superior to the traditional IRR as an evaluation criterion for capital investment projects.
a. Compute the MIRR for projects A and B.
b. Explain the shift in the IOS when using the MIRR rather than the "traditional" IRR, and then discuss the impact of the change on the accept/reject decision. (Hint: Answer this part of this question conceptually; no calculations are necessary.)
8. Discuss the choice between the mutually exclusive projects of A and B that will maximize the value of the company.
9. Capital budgeting decisions re?ect the best estimate of projects at the time the decisions are made. However, activities such as issuing securities and investing in capital assets will occur over the entire year.
a. How would the IOS change if more "good" projects (projects with higher returns) become available, and how should the company respond?
b. How does the MCC change if the cost of capital increases or decreases, and how should the company respond?
10. Discuss how the analysis would change if the company's board of directors decided not to accept the plastic plant in Florida because of the increased risk of dealing with a new pro-duction process.
11. Discuss how the analysis would change if a 2 percent risk premium is included for all three expansion projects.
12. Compute the cost of internal equity based on the Security Market Line. Compare this to the cost of equity found using the discounted cash ?ow model. Which, if either, do you think is more correct? Explain.
Attachment:- Assignment.rar