Maurice Tutor

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    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 01 Nov 2017 My Price 4.00

cost of external common equity

1) XYX corporationA????1s capital structure calls for 60% debt and 40% common equity.  The companyA????1s cost of debt is 8%. Retained earnings are estimated to be $160 million. The companyA????1s cost of retained earnings is 14% and the cost of external common equity is 16%. The corporate tax rate is 30%. Calculate the WACC below the RE break point.

2)XYZ, Inc. is considering a 5 year, 12% WACC capital budgeting project under three scenarios. If conditions are excellent, the cash flows from this project are expected to be $4,000 per year; under fair conditions, cash flows are projected at $2,500 per year; and under unfavorable conditions, cash flows are projected at ($600) per year. The initial investment outlay is $3,000 and the probabilities of these three conditions are 30%, 50% and 20%, respectively. Assume that XYZ has the option to abandon this project in the second year if conditions are unfavorable. It could do so by selling this project to another company at a price of $1,500 in year 2 and consequently cash flows would be 0 in years 3 and beyond. Calculate the standard deviation given the abandonment option.

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Maurice Tutor
(5)
Status NEW Posted 01 Nov 2017 06:11 PM My Price 4.00

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