Question

1.

Jungle Joe’s has a debt-equity ratio of 1.05. The firm has a flotation cost of debt of 7.4 percent and a flotation cost for equity of 12.74 percent. How much does the firm need to borrow to fully fund a project that has an initial cost of $68.0 million?

$78.255 million

$73.306 million

$75.560 million

$77.508 million

2.

Preston Industries has a WACC of 11.68 percent. The capital structure consists of 60.6 percent equity and 35.6 percent debt. The aftertax cost of debt is 6.1 percent and the cost of equity is 14.80 percent. What is the cost of preferred stock?
14.20 percent

17.10 percent

16.40 percent

18.30 percent

3.

Jensen Shipping is considering a project that has an initial cost of $230,000. The project will produce aftertax cash flows of $43,000 a year forever. The firm’s WACC is 14.2 percent and its tax rate is 35 percent. Equity has a flotation cost of 11.5 percent while the flotation cost for debt is 6.5 percent. What is the net present value of this project, including the flotation costs, if the firm’s debt-equity ratio is .6? (Rounded)

$42,919

$27,506

$33,506

$48,322

Answer 1

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Home nert Page Layout Formulas Data Review View dd-Ins Cut copy ▼ Format Painter Σ AutoSum ー E " ゴText - 9- wrap Tent General B 1 프 . Ej-., Δ. : r_一 逻锂函Merge & Center. $, % , 弼,8 conditional Format . Cell Insert Delete Format Paste Sort &Find & 2 ClearFe Select Edting Formatting, as Table w styles. ▼ ㆆ ▼ Clipboard Alignment Number Cells X531 531 532 533 534 535 536 537 538 539 540 541 542 543 544 545 546 547 548 549 4HKE CAPM UTILITY, SH 1 DEBT EQUITY RATIO 1.05 0.5122 0.4878 WEIGHT OF DEBT-1.05/2.05 = WEIGHT OF EQUITY = WEIGHTED AVERAGE OF FLOTATION COSTS WEIGHT OF EQUITYFLOTATION COST+WEIGHT OF DEBT WEIGHTED AVERAGE OF FLOTATION COSTS = 0.4878*12.74% +0.5122*7.4% WEIGHTED AVERAGE OF FLOTATION COSTS (f)- FLOTATION COST 10.00% AMOUNT TO BE RAISEDCOST OF PROJECT/(1-f) 68/(1-0.10) 5.56 FIRM NEED TO BORROW- 11.68% 11.68% 0.5396%-3.8%kp 60.6%*0.148 + (100%-60.6%-35.6%)kp + 35.6%*0.061 8.9688% + (3.8%)kp + 2.1716% 0.142 kp-14.2% beta bond c port future INDEX INTL CAP BUD ING PV, FV, ANNUITYDIR cleanYIELD bond stru WACC RES1 ex di erences: BD109 福 130% 04:56 18-01-2019

Home nert Page Layout Formulas Data Review View dd-Ins Cut Σ AutoSum ー E " ゴText - 9- wrap Tent General ta copy." B า 프 . Ej-., Δ. : r_一 逻锂函Merge & Center. $, % , 弼,8 conditional Format . Cell Insert Delete Format Paste Sort &Find & 2 ClearFe Select Edting Format Painter Formatting, as Table w styles. ▼ ㆆ ▼ Clipboard Alignment Number Cells 550 551 552 553 554 0.6 0.3750 0.6250 3 DEBT EQUITY RATIO WEIGHT OF DEBT 0.6/1.6 WEIGHT OF EQUITY = WEIGHTED AVERAGE OF FLOTATION COSTS WEIGHT OF EQUITYFLOTATION COST+WEIGHT OF DEBT FLOTATION COST WEIGHTED AVERAGE OF FLOTATION COSTS-0.625*11.5% +0.375*6.5% WEIGHTED AVERAGE OF FLOTATION COSTS (f)- 556 557 558 559 560 561 562 563 564 565 566 567 568 4HKE CAPM UTILITY, SH 9.6250% AMOUNT TO BE RAISEDCOST OF PROJECT/(1-f) 230000/(1-0.09625) 254495.16 COST OF PROJECT PV OF PERTUAL CF COST OF PROJECT 43000/0.142 - 254495.16 NPV- 4832 beta bond c port future INDEX INTL CAP BUD SING PV, FV, ANNUITYDIR cleanYIELD bond stru WACC RES1 ex di erences: BD109 福 130% 04:56 18-01-2019