2. Do you think the CAPM model is an appropriate way to calculate the cost of equity for these projects? Why or why not? Yes, the CAPM model is an appropriate way to calculate the cost of equity for these projects because they are short-term and it takes into account the riskiness of each project. 5. Which of the projects are unacceptable and why?
Projects A and B are unacceptable because they both have negative Net Present Values. 7. Which project do you recommend and why? Explain why each of the projects not chosen was rejected. I would recommend Project C because it has the highest net present value. This means that the project will add value to the company by increasing shareholder wealth and because the reinvestment rate is the WACC; it also has the highest terminal value which is the future value of the projects cash inflows. This makes project C the best one of the three projects. I didn’t choose Projects A or B because they both had less than zero Net Present Values which wouldn’t add any value to the company. 8. For the project you have selected, which capital structure do you recommend and why? I would recommend for Project C to have the capital structure of 20% leverage. According to the Trade-off Theory by adding the tax benefits of debt it will help to increase the value of the company. Also leverage will decrease the WACC and increase the stock price. 10. Is there anything that you think Mark is doing incorrectly or overlooking in his analysis? Mark should add to his analysis payback and discounted payback so he has all of the five measures of capital budgeting and make a more informative decision about the projects.
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