{"id":126331,"date":"2018-02-20T23:50:30","date_gmt":"2018-02-20T23:50:30","guid":{"rendered":"https:\/\/writemyessayfree.com\/cfo-project"},"modified":"2017-08-16T06:09:23","modified_gmt":"2017-08-16T06:09:23","slug":"cfo-project","status":"publish","type":"post","link":"https:\/\/www.benedictsol.com\/blogs\/cfo-project\/","title":{"rendered":"CFO Project"},"content":{"rendered":"
\n

You have just been hired as the CFO (chief financial officer) of D.W.O.T.T. Inc.  Congratulations!!! I am so super proud of you!  Now get to work!<\/p>\n

You have lots to do because the last guy was lazy and good for nothing.  Don\u2019t worry, you have his face on a dart board in your office. The president of the DWOTT has given you a fairly large \u2018to do\u2019 list and wants it ASAP.  So you load up on Monster Energy drinks and coffee and settle in to work.  It\u2019s ok though, because you LOVE this stuff.  Seriously. You do. Now that you are all jacked up on caffeine-let\u2019s get it done!<\/p>\n

First on the president\u2019s list is an evaluation of where the firm is at the present.  He has provided you with all the information you need to find the answers he wants.  For starters, the capital structure for the past year of operations is:<\/p>\n

Mortgage bonds                           $2,000
Debentures                                     1,500
Retained earnings                               500<\/p>\n

    \n
  1. What is the current financial mix?<\/strong><\/li>\n<\/ol>\n

    Answer: _________________________<\/strong><\/p>\n

    The president informed you that DWOTT has chosen to raise capital by issuing stocks and bonds in the ratio of 6.5:3.5.<\/p>\n

      \n
    1. What does that mean for your company?<\/strong><\/li>\n<\/ol>\n

       <\/strong><\/p>\n

       <\/strong><\/p>\n

       <\/strong><\/p>\n

      He also wants to know the WACC and has given you the following information about your capital budgeting:<\/p>\n

      The 20 year $1000 par value mortgage bonds were sold at $952.67 and pay 8%.  They had a $47.67 flotation cost.<\/p>\n

        \n
      1. What is the cost of the mortgage bonds?<\/strong><\/li>\n<\/ol>\n

         <\/strong><\/p>\n

        Answer: _________________________<\/strong><\/p>\n

        The 15 year $500 par value debentures were sold at $486.50 and pay 6%.  They had a $26.50 flotation cost.<\/p>\n

          \n
        1. What is the cost of the debentures?<\/strong><\/li>\n<\/ol>\n

           <\/strong><\/p>\n

          Answer: _________________________<\/strong><\/p>\n

          DWOTT paid a dividend of $.80 last year and expects them to grow 15% next year and into the foreseeable future.  The stock currently trades at $36.70.<\/p>\n

            \n
          1. What is the cost of retained earnings?<\/strong><\/li>\n<\/ol>\n

             <\/strong><\/p>\n

            Answer: _________________________<\/strong><\/p>\n

              \n
            1. What is the weighted average cost of capital?<\/strong><\/li>\n<\/ol>\n

               <\/strong><\/p>\n

              Answer: _________________________<\/strong><\/p>\n

               <\/strong><\/p>\n

               <\/strong><\/p>\n

              Now the president is starting to get on your nerves.  But, whaddayagonnado? He is the president.  You just wish he wasn\u2019t so demanding.  Nevertheless, you press on.  He has informed you that you need to aid in a decision regarding a new facility.  There are 3 mutually exclusive locations being considered each with it\u2019s own startup cost and projected cash flows as shown below:<\/p>\n\n\n\n\n\n\n\n\n\n
               <\/strong><\/td>\nTimbuktu<\/strong><\/td>\nNeverland<\/strong><\/td>\nMiddle Earth<\/strong><\/td>\n<\/tr>\n
              Cost<\/td>\n$3,600<\/td>\n$8,750<\/td>\n$6,500<\/td>\n<\/tr>\n
              Year 1 CF<\/td>\n$0<\/td>\n$4,000<\/td>\n$2,000<\/td>\n<\/tr>\n
              Year 2 CF<\/td>\n0<\/td>\n4,000<\/td>\n2,000<\/td>\n<\/tr>\n
              Year 3 CF<\/td>\n0<\/td>\n1,500<\/td>\n2,000<\/td>\n<\/tr>\n
              Year 4 CF<\/td>\n0<\/td>\n0<\/td>\n2,000<\/td>\n<\/tr>\n
              Year 5 CF<\/td>\n$8,500<\/td>\n3,000<\/td>\n3,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

              The president has asked for a thorough analysis.  Keeping in mind DWOTT\u2019scost of capital (use WACC above), what decision should be made regarding the projects above using each of the following tools(assume a 6% reinvestment rate):<\/p>\n

                \n
              1. What is each project\u2019s payback period and which would you choose?
                <\/strong>
                Timbuktu:
                <\/em>
                <\/strong>Neverland:
                <\/em>
                <\/em>Middle Earth:<\/em><\/li>\n<\/ol>\n

                Choice & Why?<\/em><\/p>\n

                 <\/em><\/p>\n

                  \n
                1. What is each project\u2019s discounted payback period and which would you choose?
                  <\/strong>
                  Timbuktu:
                  <\/em>
                  <\/strong>Neverland:
                  <\/em>
                  <\/em>Middle Earth:<\/em><\/li>\n<\/ol>\n

                  Choice & Why?<\/em><\/p>\n

                   <\/strong><\/p>\n

                    \n
                  1. What is each project\u2019s net present value and which would you choose? <\/strong>\n

                    <\/strong>Timbuktu:
                    <\/em>
                    <\/strong>Neverland:
                    <\/em>
                    <\/em>Middle Earth:<\/em><\/p>\n

                    <\/em><\/p>\n

                    Choice & Why?<\/em><\/p>\n<\/li>\n<\/ol>\n

                     <\/strong><\/p>\n

                      \n
                    1. What is each project\u2019s internal rate of return and which would you choose?
                      <\/strong>
                      Timbuktu:
                      <\/em>
                      <\/strong>Neverland:
                      <\/em>
                      <\/em>Middle Earth:<\/em><\/li>\n<\/ol>\n

                      Choice & Why?<\/em><\/p>\n

                       <\/em><\/p>\n

                       <\/strong><\/p>\n

                        \n
                      1. What is each project\u2019s modified internal rate of return and which would you choose?
                        <\/strong>
                        Timbuktu:
                        <\/em>
                        <\/strong>Neverland:
                        <\/em>
                        <\/em>Middle Earth:<\/em><\/li>\n<\/ol>\n

                        Choice & Why?<\/em><\/p>\n

                         <\/em><\/p>\n

                         <\/strong><\/p>\n

                          \n
                        1. Considering the WACC and given the calculations above, which project do you prefer, and why?<\/strong><\/li>\n<\/ol>\n

                           <\/strong><\/p>\n

                           <\/strong><\/p>\n

                           <\/strong><\/p>\n

                           <\/strong><\/p>\n

                          Now that you have decided which location you will move forward with, you must determine how you will raise the capital.  You have done some research and come up with 3 options:<\/p>\n

                          PREFERRED STOCK: DWOTT can sell preferred stock for $21 per share. The preferred stock pays an annual dividend of 3.5% based on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.25 per share. The company\u2019s marginal tax rate is 35%.<\/p>\n

                            \n
                          1. Therefore, the cost of preferred stock is:<\/strong><\/li>\n<\/ol>\n

                             <\/strong><\/p>\n

                            Answer: _________________________<\/strong><\/p>\n

                              \n
                            1. Would this work? Why or why not?<\/strong><\/li>\n<\/ol>\n

                               <\/strong><\/p>\n

                               <\/strong><\/p>\n

                               <\/strong><\/p>\n

                               <\/strong><\/p>\n

                               <\/strong><\/p>\n

                               <\/strong><\/p>\n

                               <\/strong><\/p>\n

                              COMMON STOCK: Another option available toDWOTTis to sell common stock for $27 per share and its investors require a 17% return. However, the administrative or flotation costs associated with selling the stock amount to $2.70 per share.<\/p>\n

                                \n
                              1. What is the cost of capital for DWOTT if the corporation raises money by selling common stock? <\/strong>\n

                                <\/strong><\/p>\n<\/li>\n<\/ol>\n

                                Answer: _________________________<\/strong><\/p>\n

                                  \n
                                1. Would this work? Why or why not?<\/strong><\/li>\n<\/ol>\n

                                   <\/strong><\/p>\n

                                   <\/strong><\/p>\n

                                   <\/strong><\/p>\n

                                  BONDS: Finally, you could finance the new location by issuing new 10-year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $625 each. The flotation expense on the new bonds will be $50 per bond. DWOTTis in the 35% tax bracket.<\/p>\n

                                    \n
                                  1. What is the pre-tax & after-tax cost of debt for the newly-issued bonds? <\/strong>\n

                                    <\/strong><\/p>\n<\/li>\n<\/ol>\n

                                    Answer: _________________________<\/strong><\/p>\n

                                      \n
                                    1. Would this work? Why or why not?<\/strong><\/li>\n<\/ol>\n

                                       <\/strong><\/p>\n

                                       <\/strong><\/p>\n

                                       <\/strong><\/p>\n

                                        \n
                                      1. Which of these options is realistic given what you know about the chosen location and your financial mix?<\/strong><\/li>\n<\/ol>\n

                                         <\/strong><\/p>\n

                                         <\/strong><\/p>\n

                                         <\/strong><\/p>\n

                                          \n
                                        1. BONUS (2pt): What is love? (Extra point if I literally laugh out loud). <\/strong>\n

                                          <\/strong><\/p>\n<\/li>\n<\/ol>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

                                          You have just been hired as the CFO (chief financial officer) of D.W.O.T.T. Inc.  Congratulations!!! I am so super proud of you!  Now get to work! You have lots to do because the last guy was lazy and good for Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-126331","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/126331","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=126331"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/126331\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=126331"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=126331"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=126331"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}