# TWT230412_Romy Snyder_3

1.

Calculate the after-tax cost of debt

under each of the following conditions:

a. Interest rate, 8 percent; tax rate, 0 percent. Round your answer

to two decimal places.

?%

b. Interest rate, 8 percent; tax rate, 25 percent. Round your answer

to two decimal places.

?%

c. Interest rate, 8 percent; tax rate, 30 percent. Round your answer

to two decimal places.

?%

2.

LL Incorporated’s currently outstanding

9% coupon bonds have a yield to maturity of 12%. LL believes it could issue new

bonds at par that would provide a similar yield to maturity. If its marginal

tax rate is 40%, what is LL’s after-tax cost of debt? Round the answer to two

decimal places.

?%

3.

Duggins Veterinary Supplies can issue perpetual preferred stock at

a price of $52.5 a share with an annual dividend of $3.50 a share. Ignoring

flotation costs, what is the company’s cost of preferred stock, rps?

Round the answer to two decimal places.

?%

4

Summerdahl Resorts’ common stock is currently trading at $30 a

share. The stock is expected to pay a dividend of $3.00 a share at the end of

the year (D1 = $3.00), and the dividend is expected to grow at a

constant rate of 5% a year. What is the cost of common equity? Round your

answer to two decimal places.

?%

5.

Booher Book Stores has a beta of 1.2. The yield on a 3-month T-bill is 4.5% and

the yield on a 10-year T-bond is 8%. The market risk premium is 4%, and the

return on an average stock in the market last years was 8.5%. What is the

estimated cost of common equity using the CAPM? Round your answer to two

decimal places.

?%

6.

Shi Importers’ balance sheet shows $300 million in debt, $50

million in preferred stock, and $250 million in total common equity. Shi’s tax

rate is 40%, rd = 7%, rps = 5.7%, and rs =

11%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and

65% common stock, what is Shi’s WACC? Round your answer to two decimal places.

?%

7

David Ortiz Motors has a target capital structure of 40% debt and

60% equity. The yield to maturity on the company’s outstanding bonds is 8%, and

the company’s tax rate is 40%. Ortiz’s CFO has calculated the company’s WACC as

8.74%. What is the company’s cost of equity capital? Round your answer to two

decimal places.

?%

8.On January 1, the

total market value of the Tysseland Company was $60 million. During the year,

the company plans to raise and invest $25 million in new projects. The firm’s

present market value capital structure, shown below, is considered to be

optimal. Assume that there is no short-term debt.

Debt

$30,000,000

Common

equity

30,000,000

Total

capital

$60,000,000

New bonds will have an 6% coupon rate, and they will be sold at

par. Common stock is currently selling at $30 a share. The stockholders’

required rate of return is estimated to be 12%, consisting of a dividend yield

of 4% and an expected constant growth rate of 8%. (The next expected dividend

is $1.20, so $1.20/$30 = 4%.) The marginal corporate tax rate is 40%.

a. In order to maintain the present capital structure, how much of

the new investment must be financed by common equity?

$

b. Assuming there is sufficient cash flow such that Tysseland can

maintain its target capital structure without issuing additional shares of

equity, what is its WACC? Round your answer to two decimal places.

?%

c. Suppose now that there is not enough internal cash flow and the

firm must issue new shares of stock. Qualitatively speaking, what will happen

to the WACC?

_________________

I. rs and the WACC will increase due to the flotation costs

of new equity.

II. rs and the WACC will decrease due to the flotation costs

of new equity.

III. rs will increase and the WACC will decrease due to the

flotation costs of new equity.

IV. rs will decrease and the WACC will increase due to the

flotation costs of new equity.

V. rs and the WACC will not be affected by flotation costs of

new equity.

9.

A project has an initial cost of $47,975, expected net cash

inflows of $13,000 per year for 9 years, and a cost of capital of 13%. What is

the project’s NPV? (Hint: Begin by constructing a time line.) Round your

answer to the nearest cent.

$ ________

10.

A project has an initial cost of $50,000, expected net cash

inflows of $12,000 per year for 8 years, and a cost of capital of 10%. What is

the project’s IRR? Round your answer to two decimal places.

?%

11.

A project has an initial cost of $54,575, expected net cash

inflows of $15,000 per year for 8 years, and a cost of capital of 14%. What is

the project’s MIRR? Round your answer to two decimal places.

?%

12.

A project has an initial cost of $58,550, expected net cash

inflows of $12,000 per year for 7 years, and a cost of capital of 12%. What is

the project’s payback period? Round your answer to two decimal places.

years

13.

A project has an initial cost of $36,650, expected net cash

inflows of $10,000 per year for 9 years, and a cost of capital of 13%. What is

the project’s PI? Round your answer to two decimal places.

________

14.

A project has an initial cost of $52,125, expected net cash

inflows of $12,000 per year for 8 years, and a cost of capital of 12%. What is

the project’s discounted payback period? Round your answer to two decimal

places.

years

15.

Your division is considering two investment projects, each of which

requires an up-front expenditure of $17 million. You estimate that the

investments will produce the following net cash flows:

Year

Project A

Project B

1

$ 5,000,000

$20,000,000

2

10,000,000

10,000,000

3

20,000,000

6,000,000

a. What are the two projects’ net present values, assuming the cost

of capital is 5%? Round your answers to the nearest dollar.

Project A $ __________

Project B $ __________

What are the two projects’ net present values, assuming the cost of capital is

10%? Round your answers to the nearest dollar.

Project A $ __________

Project B $ __________

What are the two projects’ net present values, assuming the cost of capital is

15%? Round your answers to the nearest dollar.

Project A $ __________

Project B $ __________

b. What are the two projects’ IRRs at these same costs of capital?

Round your answers to two decimal places.

Project A %

Project B %

16.

Davis Industries must choose between a gas-powered and an

electric-powered forklift truck for moving materials in its factory. Since both

forklifts perform the same function, the firm will choose only one. (They are

mutually exclusive investments.) The electric-powered truck will cost more, but

it will be less expensive to operate; it will cost $21,500, whereas the

gas-powered truck will cost $17,960. The cost of capital that applies to both

investments is 13%. The life for both types of truck is estimated to be 6

years, during which time the net cash flows for the electric-powered truck will

be $6,860 per year and those for the gas-powered truck will be $4,600 per year.

Annual net cash flows include depreciation expenses.

Calculate the NPV for each type of truck. Round your answers to

the nearest dollar.

Electric-powered

truck

$ ________

Gas-powered

truck

$ ________

Calculate the IRR for each type of truck. Round your answers to

two decimal places.

Electric-powered

truck

________ %

Gas-powered

truck

________ %

Which type of the truck should the firm purchase?

_________________

17.

After discovering a new gold vein in the Colorado mountains, CTC

Mining Corporation must decide whether to mine the deposit. The most

cost-effective method of mining gold is sulfuric acid extraction, a process

that results in environmental damage. Before proceeding with the extraction,

CTC must spend $900,000 for new mining equipment and pay $165,000 for its

installation. The gold mined will net the firm an estimated $350,000 each year

over the 5-year life of the vein. CTC’s cost of capital is 17%. For the purposes

of this problem, assume that the cash inflows occur at the end of the year.

a. What is the project’s NPV? Round your answer to the nearest

dollar.

$ ________

What is the project’s IRR? Round your answer to two decimal places.

?%

b. Should this project be undertaken if environmental impacts were

not a consideration?

_________________

c. How should environmental effects be considered when evaluating

this, or any other, project?

_________________

I. Environmental effects should be ignored since they would have no

effect on the project’s profitability.

II. Environmental effects should be treated as sunk costs.

III. Environmental effects could be added by estimating penalties or any

other cash outflows that might be imposed on the firm to help return the land

to its previous state (if possible).

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