North Sea Oil: NPV WACC Change in capital structure
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From the given case information, calculate the firm's WACC then use the WACC to calculate NPV and evaluate IRR for proposed capital budgeting projects with a capital rationing constraint. After you choose the project(s), recalculate the capital structure based on the assumption that the project(s) are implemented and determine if the new capital structure will signal the investors either positively, negatively, or not at all. Write a business report on your findings. Include an executive summary and appendices if applicable. See rubric for specific graded criteria. Details for assignment in attachment.
North Sea Oil has compiled the following data relative to current costs of its basic sources of external capital, long-term debt, preferred stock, and common stock equity.
(see the attached file)
North Sea Oil has the opportunity to invest in the following projects:
(see the attached file)
Using WACC to calculate the NPV and evaluate the IRR, which project should be implemented? (You may also wish to include Payback to further support your answer).
Assuming the project(s) is implemented using equity financing, the capital structure changes to:
(see the attached file)
Calculate the New WACC and briefly discuss in your report if this new WACC and capital structure might signal the market and investors.
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Solution Summary
Your tutorial is attached in Excel showing the schedules needed to analyze the data. Click in cells to see computations.
Education
- BSc, University of Virginia
- MSc, University of Virginia
- PhD, Georgia State University
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