Question

Complete using excel & formulas

1. Using the WACC in practice: Maloney’s, Inc., has found that its cost of common equity capital is 17 percent and its cost of debt capital is 6 percent. If the firm is financed with $3,000,000 of common shares (market value) and $2,000,000 of debt, then what is the after-tax weighted average cost of capital for Maloney’s if it is subject to a 40 percent marginal tax rate? 11.64%

2. Net present value: Johnson Entertainment Systems is setting up to manufacture a new line of video game consoles. The cost of the manufacturing equipment is $1,750,000. Expected cash flows over the next four years are $725,000, $850,000, $1,200,000, and $1,500,000. Given the company’s required rate of return of 15 percent, what is the NPV of this project? $1,169,806

3. PV of multiple cash flows: Jack Stuart has loaned money to his brother at an interest rate of 5.75 percent. He expects to receive $625, $650, $700, and $800 at the end of the next four years as complete repayment of the loan with interest. How much did he loan out to his brother? (Round to the nearest dollar.) $2,404

4. Internal rate of return: Casa Del Sol Property Development Company is refurbishing a 200-unit condominium complex at a cost of $1,875,000. It expects that this will lead to expected annual cash flows of $415,350 for the next seven years. What internal rate of return can the firm earn from this project? (Round to the nearest percent.) 12%

Answer 1

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E39 х fix =+D39/$D$45 A B с D E F Cost % Market value 17.00% $ 3,000,000 Weight 0.6000 WACC (Cost %xWeights) 10.20% Cost of equity (rs) 38 39 40 41 42 43 44 45 46 Bonds 0.4000 1.44% 3.60% $ 2,000,000 =6%*(1-40%) Total $ 5,000,000 1.0000 47 Weighted average cost of capital (WACC) 11.64%