1) Before-tax cost of debt and? after-tax cost of debt
Personal Finance Problem?David Abbot is interested in purchasing a bond issued
by Sony. He has obtained the following
information on the? security:
|
Sony Bond |
||
|
Par value ? $1000 |
Coupon interest rate 6.5?% |
Corporate tax rate 20?% |
|
Cost?? $920 |
Years to maturity 10?? |
Answer the following? questions:
a. Calculate the ?before-tax cost of the Sony bond using
the? bond’s yield to maturity? (YTM).
b. Calculate the ?after-tax cost of the Sony bond given the
corporate tax rate
2) Cost of common stock equity—CAPM J&M Corporation
common stock has a? beta, b?, of 0.9.
The? risk-free rate is 6%?, and the market return is 12?%.
a. Determine the risk premium on? J&M common stock.
b. Determine the required return that? J&M common stock
should provide.
c. Determine? J&M’s cost of common stock equity using
the CAPM.
3) Retained earnings versus new common stock?? Using the
data for a firm shown in the following? table, calculate the cost of retained
earnings and the cost of new common stock using the? constant-growth valuation
model.???(Click on the icon located on the? top-right corner of the data table
below in order to copy its contents into a? spreadsheet.)
|
rent market price per share |
Dividend growth rate |
Projected dividend per share next year |
Underpricing per share |
Flotation cost per share |
|
|
?$50.00 |
8?% |
?$2.00 |
?$2.00 |
?$1.75 |
4) WACC—Book weights and market weights???Webster Company
has compiled the information shown in the following? table:
|
Source of capital |
Book value |
Market value |
?After-tax cost |
|||
|
?Long-term debt |
?$4,000,000 |
?$3,920,000 |
8?% |
|||
|
Preferred stock |
40,000 |
66,000 |
12?% |
|||
|
Common stock equity |
1,060,000 |
4,579,000 |
16?% |
|||
|
Totals |
$5,100,000 |
$8,565,000 |
a. Calculate the weighted average cost of capital using book
value weights.
b. Calculate the weighted average cost of capital using
market value weights.
c. Compare the answers obtained in parts a and b. Explain
the differences
a. The? firm’s weighted average cost of capital using book
value weights is _____?%. ?(Round to two
decimal? places.)
b. The? firm’s weighted average cost of capital using market
value weights is _______?%.???(Round to two decimal? places.)
c. Compare the answers obtained in parts a and b. Explain
the differences. ? (Select the best answer? below.)
A. The book value approach yields a lower cost of capital
because the costs of the components of the capital structure are calculated
using the prevailing market prices. Since the common stock is selling at a
higher value than its market? value, the cost of capital is much higher when
using the book value weights.
B. The market value approach yields a lower cost of capital
because the costs of the components of the capital structure are calculated
using the prevailing market prices. Since the common stock is selling at a
lower value than its book? value, the cost of capital is much lower when using
the market value weights.
C. The book value approach yields a higher cost of capital
because the costs of the components of the capital structure are calculated
using the prevailing market prices. Since the common stock is selling at a
lower value than its market? value, the cost of capital is much higher when
using the book value weights.
D. The market value approach yields a higher cost of capital
because the costs of the components of the capital structure are calculated
using the prevailing market prices. Since the common stock is selling at a
higher value than its book? value, the cost of capital is much higher when using
the market value weights.
5) Calculation of individual costs and WACC ??Dillon Labs
has asked its financial manager to measure the cost of each specific type of
capital as well as the weighted average cost of capital. The weighted average cost is to be measured
by using the following? weights: 40?% ?long-term debt, 10?% preferred? stock,
and 50?% common stock equity? (retained earnings, new common? stock, or?
both). The? firm’s tax rate is 25?%.
Debt The firm can
sell for ?$980 a 18?-year, ?$1,000?-par-value bond paying annual interest at a
12.00?% coupon rate. A flotation cost of
3?% of the par value is required in addition to the discount of ?$20 per bond.
Preferred stock 10.00?% ?(annual dividend) preferred stock
having a par value of ?$100 can be sold for ?$75. An additional fee of ?$5 per share must be
paid to the underwriters.
Common stock The? firm’s common stock is currently selling
for ?$70 per share. The dividend
expected to be paid at the end of the coming year? (2016) is ?$3.31. Its dividend? payments, which have been approximately
60?% of earnings per share in the past 5? years, were as shown in the
following? table:.
It is expected that to attract? buyers, new common stock
must be underpriced ?$8 per? share, and the firm must also pay ?$2.50 per share
in flotation costs. Dividend payments
are expected to continue at 60?% of earnings. ? (Assume that r Subscript rrr?=
r Subscript srs?.)
a. Calculate the? after-tax cost of debt.
b. Calculate the cost of preferred stock.
c. Calculate the cost of common stock.
d. Calculate the WACC for Dillon Labs.
6) NPV and EVA?A project cost ?$2.9 million up front and
will generate cash flows in perpetuity of ?$280,000. The? firm’s cost of capital is 9?%.
a. Calculate the? project’s NPV.
b. Calculate the annual EVA in a typical year.
c. Calculate the overall project EVA.
7) NPV?, with rankings? Botany? Bay, Inc., a maker of
casual? clothing, is considering four projects shown in the following?
table, Because of past financial?
difficulties, the company has a high cost of capital at 14.1%.
a. Calculate the NPV of each? project, using a cost of
capital of 14.1%.
b. Rank acceptable projects by NPV.
c. Calculate the IRR of each project and use it to determine
the highest cost of capital at which all of the projects would be acceptable
a.
Calculate the NPV of each project?, using a cost
of capital of 14.1%.
The NPV of project A is ?$_________.???(Round to the
nearest? cent.)
Is project A? acceptable????(Select the best answer? below.)
A. No
B. Yes
The NPV of project B is ?$_____. ?(Round to the nearest? cent.)
Is project B? acceptable????(Select the best answer? below.)
A. No
B. Yes
The NPV of project C is ?$______. ?(Round to the nearest? cent.)
Is project C? acceptable????(Select the best answer? below.)
A. No
B. Yes
The NPV of project D is ?$________. ?(Round to the nearest? cent.)
Is project D? acceptable????(Select the best answer? below.)
A. Yes
B. No
b. Rank acceptable projects by NPV.
_____________ is
ranked number 1.???(Select from the? drop-down menu.)
_____________ is ranked number 2.???(Select from the?
drop-down menu.)
_____________ is
ranked number 3.???(Select from the? drop-down menu.)
c. Calculate the IRR of each project and use it to determine
the highest cost of capital at which all of the projects would be acceptable.
The IRR of project A is _______%. ?(Round to two decimal? places.)
The IRR of project B is _______?%. ?(Round to two decimal? places.)
The IRR of project C is _______?%. ?(Round to two decimal? places.)
The IRR of project D is ________ ?(Round to two decimal? places.)
What is the highest cost of capital at which all of the
projects would be? acceptable????(Choose the correct? answer.)
A. 10.85%
B.17.04%
C.19.05%
D.17.70%
8) All? techniques, conflicting rankings? Nicholson Roofing?
Materials, Inc., is considering two mutually exclusive? projects, each with an
initial investment of ?$110,000. The?
company’s board of directors has set a? 4-year payback requirement and has set
its cost of capital at 8?%. The cash
inflows associated with the two projects are shown in the following? table:
Cash inflows ?(CFt?)
Year Project A Project B
1 ?$35,000 ?$75,000
2 ?$35,000 ?$60,000
3 ?$35,000 ?$10,000
4 ?$35,000 ?$10,000
5 $35,000 ?$10,000
6 ?$35,000 ?$10,000
a. Calculate the payback period for each project. Rank the projects by payback period.
b. Calculate the NPV of each project. Rank the project by NPV.
c. Calculate the IRR of each project. Rank the project by IRR.
d. Make a recommendation.
a. The payback period of project A is_______ years.???(Round
to two decimal? places.)
The payback period of project B is _______ years.???(Round
to two decimal? places.)
According to the payback? method, which project should the
firm? choose????(Select the best answer? below.)
A. Project B
B. Project A
b. The NPV of project A is ?$ ________. ?(Round to the nearest? cent.)
The NPV of project B is ?$_________. ?(Round to the nearest? cent.)
According to the NPV? method, which project should the firm?
choose????(Select the best answer? below.)
A.
Project A
B. Project B
c. The IRR of project A is ______?%. ?(Round to two decimal? places.)
The IRR of project B is _______?%. ?(Round to two decimal? places.)
According to the IRR? method, which project should the firm?
choose????(Select the best answer? below.)
A.
Project A
B.
Project B
d. Which project will
you? recommend????(Select the best answer? below.)
Project B
Project A
9) Integrative —Conflicting Rankings?The? High-Flying Growth
Company? (HFGC) has been growing very rapidly in recent? years, making its
shareholders rich in the process. The
average annual rate of return on the stock in the last few years has been
2323?%, and HFGC managers believe that 2323?% is a reasonable figure for the?
firm’s cost of capital. To sustain a
high growth? rate, the HFGC CEO argues that the company must continue to invest
in projects that offer the highest rate of return possible. Two projects are currently under review. The first is an expansion of the? firm’s
production? capacity, and the second project involves introducing one of the?
firm’s existing products into a new market.
Cash flows from each project appear in the following? table:
|
Year |
Plant expansion |
Product introduction |
|||
|
0 |
-3,400,000 |
-?500,000 |
|||
|
1 |
?$1,750,000 |
?$300,000 |
|||
|
2 |
?$1,500,000 |
?$375,000 |
|||
|
3 |
?$2,250,000 |
?$300,000 |
|||
|
4 |
?$2,750,000 |
?$400,000 |
a. Calculate the NPV for both projects. Rank the projects based on their NPVs.
b. Calculate the IRR for both projects. Rank the projects based on their IRRs.
c. Calculate the PI for both projects. Rank the projects based on their PIs.
d. The firm can only afford to undertake one of these
investments. What do you think the firm
should? do?
a. The NPV of the plant expansion project is ?$ ________. ?(Round to the nearest? dollar.)
The NPV of the product introduction project is ?$________. ?(Round to the nearest? dollar.)
According to the NPV? method, which project should the firm?
choose????(Select the best answer? below.)
Plant expansion
Product introduction
b. The IRR of the
plant expansion project is _____?%.
?(Round to two decimal? places.)
The IRR of the product introduction project is ______?%. ?(Round to two decimal? places.)
According to the IRR? method, which project should the firm?
choose????(Select the best answer? below.)
Plant expansion
Product introduction
c. The PI of the plant expansion project is _______. ?(Round to two decimal? places.)
The PI of the product introduction project is ______. ?(Round to two decimal? places.)
According to the PI? method, which project should the firm?
choose????(Select the best answer? below.)
Product introduction
Plant expansion
d. If the firm can only afford to undertake one of these?
investments, which project should the firm? choose????(Select the best answer?
below.)
Product introduction
Plant expansion
10) Cooper Electronics uses NPV profiles to visually
evaluate competing projects. Key data
for the two projects under consideration are given in the following?
table:. Using these? data, graph, on the
same set of? axes, the NPV profiles for each project using discount rates of
00?%, 88?%, and the IRR.
|
Terra |
Firma |
|||
|
Initial investment |
?$24,000 |
?$24,000 |
||
|
Year |
Operating cash inflows |
|||
|
1 |
?$6,000 |
?$10,000 |
||
|
2 |
?$6,000 |
?$10,000 |
||
|
3 |
?$12,000 |
?$7,000 |
||
|
4 |
?$10,000 |
?$6,000 |
The IRR of project Terra is ________?%. ?(Round to two decimal? places.)
The IRR of project Firma is _______?%. ?(Round to two decimal? places.)
If the discount rate is 0?%, the NPV of project Terra is
?$________. ?(Round to the nearest?
cent.)
If the discount rate is 0?%, the NPV of project Firma is
?$_____. ?(Round to the nearest? cent.)
If the discount rate is 8?%, the NPV of project Terra is
?$_______. ?(Round to the nearest?
cent.)
If the discount rate is 8?%, the NPV of project Firma is
?$_____. ?(Round to the nearest? cent.)
If the discount rate is the? project’s IRR, the NPV of
project Terra is ?$__. ?(Round to the
nearest? cent.)
If the discount rate is the? project’s IRR, the NPV of
project Firma is ?$__. ?(Round to the
nearest? cent.)
Which of the following graphs correctly shows the NPV
profiles of the two? projects????(Select the best answer? below.)
