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(Answered) Capital planning strategies


Universal Parts Company is considering a bond issue instead of using its credit line to fund projects A and B. The following information was considered in deciding to change the source of capital;-The new union bargaining agreement and increases in the cost of inputs will cause an increase in working capital needs.;-UPC's credit rating has improved because of a higher than expected profitability in the just-ended accounting period. Therefore, the chief financial officer (CFO) expects a successful bond issue at a lower cost than that of the credit line.;-UPC is planning to set up automobile repair centers (project C) in 10 major cities in the United States. Project C will require a capital outlay of $40 million. UPC's current credit line will be woefully inadequate to fund the new project.;Based on your knowledge of short- and long-term capital planning strategies and UPC's business and financing needs, defend the CFO's decision to issue bonds to fund project C.;Discuss the following;-The weaknesses in the CFO's position. Under what circumstances will the CFO's proposal for capital expenditure financing result in an unfavorable capital project outcome? Suggest other sources of financing.;-Explain the impact of credit rating on cost of capital.;-Explain how you will calculate the new WACC.
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Capital planning strategies

 


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