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A firm is considering a $200,000 project that will last 3 years and has the following financial data: Annual after-tax cash flows are expected to be $90,000. Target debt/equity ratio is 0.4. Cost of equity is 14%. Cost of debt is 7%. Tax rate is 34%.

Determine the project's payback period and net present value (NPV). 2. firm is considering a $5,000 project that will generate an annual cash flow of $1,000 for the next 8 years. The firm has the following financial data: Debt/equity ratio is 50%. Cost of equity capital is 15%. Cost of new debt is 9%. Tax rate is 33%.

Determine the project's net present value (NPV) and whether or not to accept it. 3 As the director of capital budgeting for Denver Corporation, an analyst is evaluating two mutually exclusive projects with the following net cash flows: Yea Project X Project Z r 0 1 2 3 4 -$100,000 -$100,000 $50,000 $40,000 $30,000 $10,000 $10,000 $30,000 $40,000 $60,000

If Denver's cost of capital is 15%, which project should be chosen? 4 A firm is reviewing an investment opportunity that requires an initial cash outlay of $336,875 and promises to return the following irregular payments: Year 1: $100,000 Year 2: $82,000 Year 3: $76,000 Year 4: $111,000 Year 5: $142,000 If the required rate of return for the firm is 8%, what is the net present value of the investment?

5 A company is considering the purchase of a copier that costs $5,000. Assume a cost of capital of 10 percent and the following cash flow schedule: Year 1: $3,000 Year 2: $2,000

Year 3: $2,000

Determine the project's payback period and discounted payback period

6 Lincoln Coal is planning a new coal mine, which will cost $430,000 to build, with the expenditure occurring next year. The mine will bring cash inflows of $200,000 annually over the subsequent seven years. It will then cost $170,000 to close down the mine over the following year. Assume all cash flows occur at the end of the year. Alternatively, Lincoln Coal may choose to sell the site today. What minimum price should Lincoln set on the property, given a 16% required rate of return? An analyst gathered the following data about a company: Capital Structure 30% debt 20% preferred stock 50% common stock Required Rate of Return 10% for debt 11% for preferred stock 18% for common stock

Assuming a 40% tax rate, what after-tax rate of return must the company earn on its investments?

(0.3)(0.1)(1-0.4)+(0.2)(.11)+(0.5)(0.18) = 13%

7 A firm is planning a $25 million expansion project. The project will be financed with $10 million in debt and $15 million in equity stock (equal to the company's current capital structure). The before-tax required return on debt is 10% and 15% for equity. If the company is in the 35% tax bracket, what cost of capital should the firm use to determine the project's net present value (NPV)? 8 The following data is regarding the Link Company: A target debt/equity ratio of 0.5 Bonds are currently yielding 10% Link is a constant growth firm that just paid a dividend of $3.00 Stock sells for $31.50 per share, and has a growth rate of 5% Marginal tax rate is 40%

What is Link's after-tax cost of capital? Target weights: wd = 30%, wps = 20%, wce = 50%, where wd, wps, and wce are the weights used for debt, preferred stock, and common equity. Cost of components (in no particular order): 6.0%, 15.0%, and 8.5%. The cost of debt is the after-tax cost.

If Humm guesses correctly, the WACC is

**WACC = (0.30 x 0.06) + (0.20 x 0.085) (0.5 x 0.15) = 11%
**

9 An investor purchases a 10-year, $1,000 par value bond that pays annual coupons of $100. If the market rate of interest is 12%, what is the current market value of the bond? 1 An investor wants to receive $1,000 at the beginning of each of the next ten years with the first payment

starting today. If the investor can earn 10 percent interest, what must the investor put into the account today in order to receive this $1,000 cash flow stream? 2 If an investor puts $5,724 per year, starting at the end of the first year, in an account earning 8% and ends up accumulating $500,000, how many years did it take the investor?

3 Bill Jones is creating a charitable trust to provide six annual payments of $20,000 each, beginning next year. How much must Jones set aside now at 10% interest compounded annually to meet the required disbursements? 4 Find the future value of the following uneven cash flow stream. Assume end of the year payments. The discount rate is 12%. Year 1 Year 2 Year 3 Year 4 Year 5 -2,000 -3,000 6,000 25,000 30,000

5 What is the total present value of $200 to be received one year from now, $300 to be received 3 years from now, and $600 to be received 5 years from now assuming an interest rate of 5%? 6 How much would the following income stream be worth assuming a 12% discount rate? $100 received today. $200 received 1 year from today. $400 received 2 years from today.

$300 received 3 years from today

7 Given the following cash flow stream: End of Year 1 2 3 4 Annual Cash Flow $4,000 $2,000 -0-$1,000

Using a 10% discount rate, the present value of this cash flow stream is:

8 If $10,000 is invested in a mutual fund that returns 12% per year, after 30 years the investment will be worth: 9 Compute the present value of a perpetuity with $100 payments beginning four years from now. Assume the appropriate annual interest rate is 10%.

ANSWERS 1:

A firm is considering a $200,000 project that will last 3 years and has the following financial data: Annual after-tax cash flows are expected to be $90,000. Target debt/equity ratio is 0.4. Cost of equity is 14%. Cost of debt is 7%. Tax rate is 34%. The debt to equity is .40, so i'm i right in saying that its 2/3 = 2/5(7)(.66)+3/5(14) 1.85+8.40 = 10.25% wacc SChweser used the following: First, calculate the weights for debt and equity wd + we = 1 we = 1 − wd wd / we = 0.40 wd = 0.40 ?(1 − wd) wd = 0.40 − 0.40wd 1.40wd = 0.40 wd = 0.286, we = 0.714 So is my way incorrect? For this one you have to start out by calculating the WACC WACC = (Equity/Value)xRe + (Debt/Value)xRdx(1-tax rate) =(2.5/3.5)x0.14+(1/3.5)x0.07x(1-0.34) =0.10+0.0132 =0.1132 Now that you have the WACC you can find the PV of a 3yr annuity of $90,000 PV = $218716.02 therefore NPV = $18716.02

therefore the investment should be considered if it meets strategic objectives and there is no other mutually exclusive projects with a higher NPV******************************

WACC = (Wd x Kd)+(1 – t)+(We x Ke) = (0.286 x 0.07)x(0.66)+(0.714 x 0.14) = 0.1132

http://www.docstoc.com/docs/64557008/Calculator-Risk-Return-Stock-Beta-Debt-Equity-ReturnAnnuity-Perpetuity

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