Quiz 5 Capital budgeting and Bond Valuation

Q1 Walmart is considering two mutually exclusive projects. The firm, which has a 12% cost of capital,
has estimated its cash flows as shown in the following table.

a) Calculate the NPV of each project, and assess its acceptability. 5 Marks

Years Project A Project B

1 0.892857 22321.43 0.892857 35,714

2 0.797194 27901.79 0.797194 27901.79
3 0.71178 32030.11 0.71178 21353.41
4 0.635518 31775.9 0.635518 6355.181
5 0.567427 31,208 0.567427 2837.134
145,238 94,162

NPV= 15,238 NPV= 9,162

Project A is more acceptability

b). Calculate the IRR for each project, and assess its acceptability. 5 Marks

Project A Project B
12% 20% 12%
1 0.892857 22321.43 0.833333 20833.33 0.892857
2 0.797194 27901.79 0.694444 24305.56 0.797194
3 0.71178 32030.11 0.578704 26041.67 0.71178
4 0.635518 31775.9 0.482253 24112.65 0.635518
5 0.567427 31,208 0.401878 22,103 0.567427
 145,238 117,396

IRR= 12% + 5.216507 * 8.00% 12%

0.54 0.730951

Project B is more acceptable

Q2 A share of preferred stock for the New Orleans Clothing Company just sold for $100 and carries an $6 annual divide
This stock has a call price of $120 in five years. What is this preferred stock’s yield to call?

b The Glazer Apparel Company has noncallable, perpetual bonds outstanding.

When originally issued, the perpetual bonds sold for $845 per bond;
their current market price is $1,100 per bond. The company pays a semiannual interest
payment of $35 per bond on June 30 and December 31 each year.
a. As of today (January 1), what is the implied semiannual yield on these bonds?
b. Using your answer to Part (a), what is the (nominal annual) yield on these bonds? the
(effective annual) yield on these bonds?
st of capital,

20%
35,714 0.833333 33,333
27901.79 0.694444 24305.56
21353.41 0.578704 17361.11
6355.181 0.482253 4822.531
2837.134 0.401878 2009.388
 94,162 81,832

+ 7.636881 * 8.00%

nd carries an $6 annual dividend? 6 Marks

2 Marks
2 Marks