Part (a) and (b)
Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The last two rows highlighted in yellow contain your answer. All financials are in $.
Parameter | Linkage | Option A | Option B |
Cost | A | 178,000 | 187,000 |
Equity funded proportion | B | 40% | 40% |
Equity required | C = A x B | 71,200 | 74,800 |
Net income | D | 3,500,000 | 3,500,000 |
Part (a): Residual dividend | E = D - C | 3,322,000 | 3,313,000 |
Part (b): Dividend payout ratio | F = E / D | 94.91% | 94.66% |
For part (c), (d) and (e), i am first providing the answers. Details workings along with the snapshot is available towards the end of the solution.
Part (c)
Based on payback period, the company should choose option B (shown as option 2) in the table below, as it has payback period of 3.31 years less than the cutoff value of 3.5 years.
Part (d)
Based on NPV, the company should choose option B (shown as option 2) in the table below, as it has higher NPV than option A.
Part (e)
Considering both the methods, the company should choose option B. This has higher NPV and meets the payback criterion of the firm as well.
Please see the table below. The rows highlighted in yellow is your answer. Figures in parenthesis, if any, mean negative values. All financials are in $. Adjacent cells in blue contain the formula in excel I have used.
investedent pajecl that tequte a cod Nau s00,c00 The fn plana a capthal chuchuk det equihy...