Assignment 2: LASA 1—Capital Budgeting and Dividend Policies

Assignment 2: LASA 1—Capital Budgeting and Dividend Policies
Cramer Industries has identified several investment opportunities that will become available over the next year and would like you to evaluate these projects. They have asked that you use the NPV and IRR methods to determine if these independent projects are acceptable. For the NPV, use a required rate of return of 8%..
Table-1:
Project
Cash Flows/Year
(in thousands)
Length of Project
Cost and Date when Cost is incurred
A
\$ 2,300.00
5 years
\$ 8,000.00 @t=0
B
\$ 3,000.00
5 years
\$ 10,000.00 @t=0
C
\$ 2,800.00
5 years
\$ 9,000.00 @t=0
D
\$ 2,100.00
5 years
\$ 8,500.00 @t=0
Cramer currently has 2,000,000 shares outstanding and pays a dividend of \$2 per share.
With a high degree of certainty, Cramer has projected their income for the next four years as follows, which includes the annual cash flows from the investments selected above:
Table-2:
Year
Income After Taxes
1
\$6,000.00
2
\$8,000.00
3
\$5,000.00
4
\$7,000.00
Questions:
1.What is the NPV for each project at the time the investment would be made? Explain your findings.
2.What is the IRR for each project at the time the investment would be made? Explain your findings
3.Which investments should be selected? Justify your conclusions.
4.What will the dividends per share and the external financing required, if the current dividend per share is maintained? If the projects meet the NPV and IRR tests, assume that Project ‘A’ is implemented in Year 1, Project ‘B’ in Year 2, Project ‘C’ in Year 3 and Project ‘D’ in Year 4. Justify your conclusions.
5.Assuming the same investment patterns as in Part 4, what will be the dividends and the external financing required, if the dividend per share payout ratio of 50% is maintained? Explain your answers.
6.Assuming the same investment patterns as in Part 4, if the dividend policy is considered a residual decision, what will be the dividends and external financing requirement in each year? Explain your answers.
7.Under which policy will external financing be minimized? Justify your conclusions.
Present your analysis of the assigned problems in Excel format. Enter non-numerical responses in the same worksheet using textboxes.
By the due date assigned, deliver your assignment to the Submissions Area.
Create the file with the following name: LastnameFirstInitial_M3A2.Excel.xls.
Assignment 2 Grading Criteria
Maximum Points
Correctly calculated the NPV for each project and explained its meaning and significance to the firm.
20
Correctly calculated the IRR for each project and explained its meaning and significance to the firm..
20
Correctly selected the projects in which the company should invest and justified the conclusions.
20
Correctly determined the external financing requirement, assuming the current dividend policy is maintained and justified the response.
24
Correctly determined the external financing requirement, assuming that a 50% payout ratio is maintained and justified the response.
24
Correctly determined the external financing requirement, assuming it is a residual decision and justified the response.
24
Correctly identified the dividend policy that minimizes the external financing level and justified the response.
24
Written Components:
Organization (12)
usage and mechanics (12)
APA elements (16)
Style (4)
44
Total:
200