Chapter 8 B3. (Capital structure weights) The cost of capital is 14%, the after-tax cost of debt is 6%, and the cost of equity is 16%. What proportions of the firm are financed with debt and equity? B4. (Capital structure weights) The required return on debt (before taxes) is 7.5%, the required return on equity is 15%, and the cost of capital is 10%. If the marginal income tax rate is 40%, what are the proportions of debt and equity financing? B5. (Evaluating investments with differing risks) You are considering three stocks for investment purposes. The required return on the market portfolio is 14%, and the riskless return is 9%. Based on the information given, in which (if any) of these stocks should you invest? STOCK BETA CURRENT PRICE LAST DIVIDEND GROWTH RATE A 1.3 $15 $1.20 5% B 0.9 28 1.30 10 C 1.1 31 2.40 8 B6. (Finding the WACC) The information given here has been gathered about O’ryan Swim- Where, Ltd. Based on this information, estimate O’ryan’s WACC. Current market value of common shares (10 million outstanding) $23.63/share Next year’s expected cash dividend $1.92/share Expected constant annual dividend growth rate 8% Current market value of bonds (100,000 bonds outstanding, 8.5% coupon, maturing in 21 years) $835.00/bond Corporate tax rate 34% Chapter 9 A5. (Investment criteria) Compute the NPV, IRR, and payback period for the following investment. The cost of capital is 10%. YEAR 0 1 2 3 Cash flow -200,000 100,000 100,000 150,000 A6. (Payback and discounted payback) Find the payback and the discounted payback for a project with the cash flows given here. The cost of capital is 12%. YEAR 0 1 2 3 4 Cash flow -10 3 3 4 6 A11. (Payback and NPV) Three projects have the cash flows given here. The cost of capital is 10%. a. Calculate the paybacks for all three projects. Rank the projects from best to worst based on their paybacks. b. Calculate the NPVs for all three projects. Rank the projects from best to worst based on their...Chapter 8

 

B3. (Capital structure weights) The cost of capital is 14%, the after-tax cost of debt is 6%, and the cost of equity is 16%. What proportions of the firm are financed with debt and equity?

 

B4. (Capital structure weights) The required return on debt (before taxes) is 7.5%, the required return on equity is 15%, and the cost of capital is 10%. If the marginal income tax rate is

40%, what are the proportions of debt and equity financing?

 

B5. (Evaluating investments with differing risks) You are considering three stocks for investment purposes. The required return on the market portfolio is 14%, and the riskless return is 9%. Based on the information given, in which (if any) of these stocks should you invest?

 

STOCK BETA CURRENT PRICE LAST DIVIDEND GROWTH RATE

A 1.3 $15 $1.20 5%

B 0.9 28 1.30 10

C 1.1 31 2.40 8

 

B6. (Finding the WACC) The information given here has been gathered about  O’ryan Swim- Where, Ltd. Based on this information, estimate O’ryan’s WACC.

 

Current market value of common shares (10 million outstanding) $23.63/share

Next year’s expected cash dividend $1.92/share

Expected constant annual dividend growth rate 8%

Current market value of bonds

(100,000 bonds outstanding, 8.5% coupon, maturing in 21 years) $835.00/bond

Corporate tax rate 34%

 

 

Chapter 9

 

A5. (Investment criteria) Compute the NPV, IRR, and payback period for the following investment.

The cost of capital is 10%.

 

YEAR 0 1 2 3

Cash flow −200,000 100,000 100,000 150,000

 

A6. (Payback and discounted payback) Find the payback and the discounted payback for a project

with the cash flows given here. The cost of capital is 12%.

 

YEAR 0 1 2 3 4

Cash flow −10 3 3 4 6

 

A11. (Payback and NPV) Three projects have the cash flows given here. The cost of capital is 10%.

 

a. Calculate the paybacks for all three projects. Rank the projects from best to worst based on their paybacks.

 

b. Calculate the NPVs for all three projects. Rank the projects from best to worst based on their NPVs.

 

c. Why are these two sets of rankings different?

 

YEAR 0 1 2 3 4 5

Project 1 −10 4 3 2 1 5

Project 2 −10 1 2 3 4 5

Project 3 −10 4 3 2 1 10

 

Chapter 11

 

A5. (Postponement option) Suppose IBM can introduce a new technology now or wait one year. The cash flows for investing now or postponing one year are:

 

TIME 0 1 2 3 4 5 6

Invest now −200 50 100 100 100 100 100

 

Invest in one year −400 150 150 150 150 150

 

 

A10. (Salvage value) Suppose GAF Corporation is contemplating a capital budgeting project with capital assets that will be depreciated to a book value of $10,000 but are expected tomhave a salvage value of $18,000. GAF’s marginal tax rate is 34%. Cleanup and removal expenses are expected to be $1,000, and there will be a $2,000 return of working capital. What is the net salvage value?

 

A11. (Basic capital budgeting) The investment is $1,000,000, which is depreciated straight line for 10 years down to a zero salvage value. For its 10-year life, the investment will generate annual sales of $800,000 and annual cash operating expenses of $250,000. Although the investment is depreciated to a zero book value, you expect to sell it for $200,000 in 10 years. The marginal income tax rate is 30% and the cost of capital is 10%.

 

a. What after-tax net cash flows are expected?

 

b. What is the NPV of the investment?