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Problem 5: (30 points) Stox Corporation has 125,000 shares of common stock outstanding at a market price of $55 per share. The firm has also 50,000 bonds outstanding, paying a 7.5% coupon $100 each, and currently selling at 93 percent of par value. The current yield to maturity on those bonds is 7.0% (pre-tax cost of debt) The tax rate paid by the company is 35%. rate, with a face value of tha The beta of the companys stock is 1.74 and the equity risk premium is 8.0%. The risk-free rate of return is 3.25%. 1) Estimate the cost of equity re of Stox Corporation using the CAPM model 2) Calculate the Weighted-Average Cost of Capital (WACC) of Stox Corporation The company is considering two mutually exclusive investment projects that require the same initial investment. Unfortunately, it can only afford one of the two projects. The following table shows the expected cash flows from year 1 to 4 for each project m Y ri Year 2 Year 3 Year 4 id nish Year 1 Project A 2.960.0902.637.070 2.973.320 3.553.410 Project B 3.995.010 2.540.206 1.565.840 1.305.446 uage 1) Calculate the present value of the cash flows for each project, using the WACC as the m Y discount rate. 2) In which project would you advise the company to invest? Justify your answer.

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PAGE-L Dste CAPITAL ReISED FRoh EaUTY Pu ce CAPM RERS Risk Free Rate 3 Beta CAPITAL RAISED FRoh BoNnDERT CAPITAL STRUCTURE

PAGE-2 1人つACC 97/ 19

YEAR PROJECT A PROJECT B WAcel 14.93% 1 2960.09 2 2637.07 3 2973.32 43553.41 3995.01 2540.206 1565.84 1305.446 NPV 8,567.20 乏7,178.80

In this case we will Select Project A is its NPV(net present value is higher ) as compare to Project B

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