Option #1: Corporate Finance Application Part A: Ratio Analysis (Week 3 Milestone)

Attached are the financial statements for Smith Company, Inc. Use the financial statements to calculate the attached ratios.

• Calculate and interpret the following debt ratios: debt ratio, debt-equity ratio, and times interest earned.

• Calculate and interpret the following profitability ratios: operating profit margin, net profit margin, return on assets, and return on equity.

Part B: Require Return for Capital Funding (Week 5 Milestone)

Suppose that Smith Company is considering a new project. They are trying to determine the required rate of return for their debt and equity holders. See the information below:

• A 7.5% percent annual coupon bond with 20 years to maturity, selling for 104 percent of par. The bonds make semiannual payments. What is the before tax cost of debt? If the tax rate is 40%, what is the after-tax cost of debt?

• The firm's beta is 1.2. The risk-free rate is 4.0% and the expected market return is 9%. What is the cost of equity using CAPM?

(Please refer Part C. below only. See balance sheet below)

Part C: WACC and Capital Budgeting

• Calculate the firm's WACC (using 2018 numbers). (You will need to collect information on the long-term debt and common stock equity from the Balance Sheet. The firm has no preferred stock).

• Use the WACC to calculate NPV and evaluate IRR for proposed capital budgeting projects. Assume the projects are mutually exclusive and the firm has the money available to fund the project.

(The below has been included to show the complete problem, only. No writing assignment is requested.)

Part D: Analysis

• You will must offer suggests to a senior financial manager and CFO on the proposed projects. Be sure to include a discussion of external funding and where it should come from if necessary and which project the firm should undertake, include presentation, a minimum of one slide for each part, summarizing your results. You should submit either an Excel or Word document showing your work for each part.