Question 1 (30 Marks)
Company Marvel has been in the filmmaking industry for quite a while and is specialized in making sci-fi and superhero movies. Due to recent advancement of digital technology and 5G internet, the company decides to set up a subsidiary company (Company Cyrus), which will specialize to focus on the development of filmmaking and internet related technology. This will further improve the companys comparative advantage in filmmaking industry and capture the latest trend and taste in the younger generation per comment from its CEO.
The total capital requirement of Company Cyrus will be at $30 million in total in market value term in the beginning. Company Marvel decides to finance Company Cyrus operations with 40 percent corporate bond, 20 percent of preferred stock and 40 percent common stock. Company Marvels current net income is $18 million with a dividend payout ratio of 30%.
Company Marvel currently has outstanding corporate bond of its own for $1 million notional amount in aggregate. The annual coupon rate of this bond is 8% and it is paid annually. The bond still has 5 years to maturity. The bond is currently traded in the bond market for $924,184 in aggregate total.
The preferred stock issued by Company Marvel have a perpetuity annual dividend payment of 6% for every $100 notional per share. Preferred stock is currently traded in the market for $75 per share.
Company Marvels common stock is currently traded at $60 per share, and its current dividend payout is $5 per share. The dividend is also expected to grow at a constant rate of 10% a year forever. The flotation cost of external equity, if it is issued, is 5% of the dollar amount issued. Assume the tax rate is 25%. (Please show your calculations in all below question from (a) to (e))
a What is Company Marvels cost of common stock?
b What is Company Marvels cost of debt?
c What is Company Marvels cost of preferred stock?
(d) Does Company Marvel need to issue new common stock or not and why? (5 marks)
(e) Estimate Company Cyrus Weighted Average Cost of Capital (WACC). (10 marks)
Question 2 (70 Marks) P
You have learned five capital budgeting techniques(NPV IRR Payback Period Discounted Payback Period and Profitability Index) in this course. Describe the details and analyze the limitations of each of these capital budgeting techniques. Also, other than the capital budgeting technique itself, please provide your own views regarding what other factors which potentially may cause the inaccuracy of capital budgeting results in reality. You need to provide real life examples to illustrate your arguments. (not more than 700 words in total)
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