FIN320 – Gallaher – Prep for Exam 3 – Computational Questions 1. Smallville Courier is a small town newspaper, with revenues of $200,000 and pre-tax operating income of $40,000. It is considering starting an online edition that would be accessible at no cost to the general public and has collected the following information: 1. The initial cost of setting up the online edition is $25,000. That expense will be capitalized and depreciated using the MACRS three-year schedule (33%, 45%, 15%, 7%). There is no salvage value. 1. You expect advertising revenues from the site of $30,000 per year. 1. The annual operating cost of maintaining the online edition will be $15,000. 1. The cost of capital is 15% and the tax rate is 40%. 1. The project has a life of 5 years. Should Smallville go ahead with the project? (Include in your answer the following: What are the annual incremental free cash flows associated with this project? What is the NPV? What is the IRR? What is the payback period?) 1. Wade Natural, a beverage company, is considering expanding into the snack business and you have collected the following information on the investment: i. You estimate the beta of comparable companies in the snack business to be 0.92. ii. The equity in Wade Natural has a book value of $ 500 million, but the market value of equity is $2 billion. iii. The firm has $500 million (in market value terms) in interest-bearing debt with 10 year to maturity. The debt currently trades $900 per bond (Face Value = $1,000) and pays a 4% semi-annual coupon. iv. The risk-free rate is 4% and the equity risk premium is 5%. v. The marginal tax rate is 40%. What is Wade Natural’s WACC? Running head: ASSIGNMENT 2: PROJECT MOTORCYCLES 1 ASSIGNMENT 2: PROJECT MOTORCYCLES 9 Assignment 2: Project Motorcycles M. Owens Strayer University Project Management BUS 375 Professor Puckett October 31, 2013 Select one (1) of the types of project organization that would suit the development of the larger touring class motorcycles. The project management organization I would use for this instance is pure project management organization. This helps to separate this project from the home company. It will be an independent segment. It will have its own technical staff and administration, which would be linked to the home company's administration. However, these links will not be strong, and it will enjoy some autonomy. This segment will be able to prepare its own reports on how the project is advancing, make minor purchases, and deliveries without consulting the home company. This will be in order to quicken the development of the motorcycles. The project manager is the head of this segment he will bear full responsibility for the project, although he will report to the senior staff at the home company. This decentralization will also lead to better communication in this segment as the project manager will be able to make some decisions without consulting senior staff in ...

1. FIN320 – Gallaher – Prep for Exam 3 – Computational
Questions
1. Smallville Courier is a small town newspaper, with revenues
of $200,000 and pre-tax operating income of $40,000. It is
considering starting an online edition that would be accessible
at no cost to the general public and has collected the following
information:
1. The initial cost of setting up the online edition is $25,000.
That expense will be capitalized and depreciated using the
MACRS three-year schedule (33%, 45%, 15%, 7%). There is no
salvage value.
1. You expect advertising revenues from the site of $30,000 per
year.
1. The annual operating cost of maintaining the online edition
will be $15,000.
1. The cost of capital is 15% and the tax rate is 40%.
1. The project has a life of 5 years.
Should Smallville go ahead with the project?
(Include in your answer the following: What are the annual
incremental free cash flows associated with this project? What
is the NPV? What is the IRR? What is the payback period?)
1. Wade Natural, a beverage company, is considering expanding
into the snack business and you have collected the following
information on the investment:
i. You estimate the beta of comparable companies in the snack
business to be 0.92.
ii. The equity in Wade Natural has a book value of $ 500
million, but the market value of equity is $2 billion.
iii. The firm has $500 million (in market value terms) in

2. interest-bearing debt with 10 year to maturity. The debt
currently trades $900 per bond (Face Value = $1,000) and pays
a 4% semi-annual coupon.
iv. The risk-free rate is 4% and the equity risk premium is 5%.
v. The marginal tax rate is 40%.
What is Wade Natural’s WACC?
Running head: ASSIGNMENT 2: PROJECT MOTORCYCLES
1
ASSIGNMENT 2: PROJECT MOTORCYCLES
9
Assignment 2: Project Motorcycles
M. Owens
Strayer University
Project Management BUS 375
Professor Puckett
October 31, 2013
Select one (1) of the types of project organization that would
suit the development of the larger touring class motorcycles.
The project management organization I would use for this
instance is pure project management organization. This helps to
separate this project from the home company. It will be an
independent segment. It will have its own technical staff and
administration, which would be linked to the home company's
administration. However, these links will not be strong, and it

3. will enjoy some autonomy. This segment will be able to
prepare its own reports on how the project is advancing, make
minor purchases, and deliveries without consulting the home
company. This will be in order to quicken the development of
the motorcycles. The project manager is the head of this
segment he will bear full responsibility for the project, although
he will report to the senior staff at the home company. This
decentralization will also lead to better communication in this
segment as the project manager will be able to make some
decisions without consulting senior staff in the home company.
Outline the process steps that your company would take in order
to develop the motorcycle. Provide a rationale for the response.
1. Team Assembly
The team tasked with assembling the motorcycles has already
been assembled. This team could be selected from within the
home company, or in this case of the skilled labour, experts
from outside could be included. The team should have
representatives from the clients, vendors, subcontractors, and
suppliers to give their opinions and views on the development
of the motorcycles (Archbold).
2. Definition of Project Objective
Once the team is together, it should come up with a clear
purpose and objectives to carry out the project. A phase-exit
review should also be conducted to determine whether the
project should continue to the next phase (Archbold).
3. Definition of Project Scope
The team should develop an appropriate Work Breakdown
Structure. This will ensure that all the stakeholders in the
project understand what's expected to be done throughout the
span of the project (Kerzner, 2013, p.529). Ensuring the

4. project's divided into small manageable sub-projects will assist
with an easier completion of the project.
4. Initial Plan
The tasks in the Work Breakdown Structure should be organized
into logical network diagrams. Estimated durations should also
be attached to the individual activities in the network diagrams.
These include the earliest start times and latest finish times.
This information will help the project manager to estimate the
completion times of the projects and assess the feasibility of the
targeted days (Kerzner, 2013, p. 537). With this information,
he will also be able to determine the critical path for the
project.
5. Ascertainment of Resources, Costs and Risks
The project team will then determine the resources required for
the project, how to obtain these resources and their cost.
Information, when cost occurs can assist in avoiding cash flow
problems during the project. Risk assessment should also be
made to ensure the project does not have a high risk. Risk
management should further be considered to be able to handle
problems that are beyond the capacity of the project team.
6. Obtain Stakeholder Buy-in
Support of all the stakeholders involved in the project should be
sought to ensure smooth implementation and completion of the
project. The initial plans should be reviewed in the presence of
all stakeholders and the project team should try to solicit buy-in
from each of the stakeholders (Hopkin, 2012). Finally, a phase-
exit review should be carried out to determine whether the
project is ready to continue to the next stage.
7. Publish the Plan

5. The plan for the entire project should be published either
through electronic means, hard copy, or both (Archbold). It is
important to communicate the details of the project effectively
to all the stakeholders. To ensure this communication is
effective, a communication plan should be developed, so plans
can be distributed accurately.
8. Collection of Progress Information
The project manager should closely monitor the project, his
team, and should collect project information from time to time.
This will assist in preparing progress reports that will include
details such as the projects completed within a specified
duration, projects planned for the next duration, resources used
in the duration, and a forecast of the resources used in the
following duration. The growth of the project can also be
measured in other ways such as activity float statistics and
earned value. If the project manager determines the completion
of the project, he will carry out the phase-exit review, and the
project will move into its final phase.
9. Analysis of Current Status
From the development information that the project manager has
received, he will be able to determine which parts of the project
require attention or are likely to cause problems in the future.
This will eventually enable the project manager to be able to
focus on the necessary parts of the project, so as to achieve
greater success.
10. Adjustment of Project Plan
With support from the project team and judging from the review
of the current status, the project manager should make
adjustments to the plan to reduce the risk to accommodate

6. changes, and make up for projects that have fallen behind
schedule. Once the project manager has achieved this, he will
republish the plan. This step is repeated over and over again as
deemed necessary until the projects completed.
11. Project Closure
Once setting out and achieving these objectives the project
manager will then close the project.
This closure will have two aspects: archiving project materials
and financial closure. The project team will also document the
lessons and experiences from the project to help in future
projects.
Recommend one (1) strategy to the senior executives that the
organization might use to balance short- and long-term needs.
To balance short-term and long-term needs; I would suggest the
balanced scorecard. It consists of non-financial metrics, which
predict financial performance and not only reporting the past.
The balanced scorecard links long-term strategies to short-term
decisions and actions (Kaplan & Norton, 2007). This gives the
senior executives better quality information as compared to
financial data. Senior executives will not only rely on the
financial indicators, as the only indicators, of performance for
the company. The balanced scorecard consists of four
management processes: communication and linking, business
planning, translating the visioning communication and linking
(Kaplan & Norton, 2007). These processes will lead to the
linking of long-term objectives and effects to short-term
actions, as a result, the senior executives will be able to balance
their short-term and long-term needs.
Specify the crucial resources that you would need as a project
manager to run the existing business interests at the same time
that the business changes to the production of touring class
motorcycles.
One of the most important resources needed to run the existing
business would be the skilled technicians. Skilled technicians

7. will then be tasked to coming up with the prototype of a new
motorcycle for the target market. It is very important that they
come up with a design that will please the target market, or the
project would be a failure. The technicians will also be tasked
with maintaining the quality of the existing designs to be able
to hold on to the existing clientele.
The amount of money that will be available for this project and
for running the operations of the existing business interests is
also very important. Lack of money to fund research, to
manufacture and to purchase parts might lead to failure of the
project. Money should be divided into a proportional manner,
to avoid grinding any of the two undertakings to a halt.
Purchases should be made in a considerate manner and during
the right period to avoid cash flow problems.
Suggest the project management leadership style that is most
conducive to overseeing the operation of the business growth
plan.
The most conducive project management leadership style that
will oversee the operations of the business growth plan is the
democratic management style (Hopkin, 2012). This style is
mainly about building the team’s consensus. If the team does
not support the idea, there are high chances that the project will
not be a success. The project manager should listen to all the
views of team members before, during and after completion of
the project. He should be open to new ideas and suggestions.
Once hearing and considering the team’s views the team will
own the plan, then the project will most likely be a success. If
the team does not discuss their views, the project may not be a
success.
Recommend at least three (3) risk mitigation strategies to
address project plan details that might be forgotten or
overlooked. Justify the selection.
1. Risk Acceptance
The project team could decide to accept that they have
overlooked some parts of the plan and adjust the plan

8. accordingly. This approach is most viable when the cost of risk
management options like risk avoidance or risk limitation
outweighs the cost of the risk. Companies that do not spend a
lot of money to avoid high possibility risks may use this
strategy.
2. Risk Avoidance
This is the direct opposite of risk acceptance. The project team
in this case takes every possible measure to avoid the
occurrence of risk. However, it will cost a lot to avoid all the
risks. Therefore, this is the most expensive risk mitigation
strategy (MHA Consulting, 2013).
3. Risk Limitation
This is the most common form of risk mitigation. This involves
limiting the company’s exposure to risk, by performing a
certain action like having a disclaimer on its products or
suggesting ways of avoiding problems with its products; such as
using the right oil for the motorcycle to function well (MHA
Consulting, 2013).
Reference
Archbold, K. (2012). The simplified project management
process. Retrieved from
http://www.projectsmart.co.uk/simplified-project-management-
process.html
Kerzner, H. (2013). Project management: A systems approach to
planning, scheduling, and
controlling. (11th ed., pp. 529-537). Hoboken, NJ: John Wiley
& Sons, Inc.
Hopkin, M. R. (2012, October 20). [Web log message].
Retrieved from
management/"
http://leadonpurposeblog.com/2012/10/20/five-leadership-
styles-for-successful-project-

9. management/
Kaplan, R. S., & Norton, D. P. (2007, July). Using the balanced
scorecard as a strategic
management system. Retrieved from
http://hbr.org/2007/07/using-the-balanced-scorecard-as-a-
strategic-management-system/ar/1
MHA Consulting. (2013, May 17). Four types of risk mitigation.
Retrieved from http://mha-
it.com/2013/05/four-types-of-risk-mitigation/
FIN320 – Gallaher – Topics for Exam 3
The computational questions on the exam will concern capital
budgeting, and the weighted average cost of capital.
The conceptual questions on the test will concern the following
topics.
1. How do we handle financing cash flows (interest expense,
dividends, etc.) in capital budgeting?
2. What is the Weighted Average Cost of Capital (WACC)?
3. What do we mean by “cost of [debt, preferred stock, common
stock]”?
4. What ways can we estimate the cost of debt?
5. How do we estimate the cost of preferred stock?
6. What ways can we estimate the cost of common stock?
7. In the WACC equation, why do we multiply the cost of debt
by (1 – tax rate)?
8. What can we use the WACC for?
9. What if the project we are considering is not similar to our
existing assets?
10. What do we mean by incremental cash flows?

10. 11. What are sunk costs? Opportunity costs? Cannibalization
and synergies? How do we deal with each of these in a capital
budgeting analysis?
12. What is free cash flow? How is it different from net
income?
13. How are capital expenditures treated by accounting? … by
finance?
14. Why do we care about depreciation (which is not a cash
flow)?
15. What is working capital (from a finance point of view) and
how is it important to capital budgeting?
16. Why is NPV considered to be the best method for capital
budgeting?
17. What are the limitations of the payback period?
18. What are the limitations of IRR? When does it have
problems? When will it agree with NPV?
19. What are “mutually exclusive” projects?
20. What are “non-normal cash flows”?
21. What is an NPV profile?
22. How can increasing debt make the firm more valuable?
How can increasing the debt make the firm less valuable?
Explain the Trade-Off Theory of Capital Structure.
23. Explain the Pecking Order Theory of Capital Structure.