Question

Snow Cone Inc. has determined its cost of each source of capital and optimal capital structure as followed.

Source of Capital	Proportions	Before-tax Cost
Long-term Debt	$45,000	8%
Common stock	$55,000	16%

The firm has 21% tax rate. How much is their weighted average cost of capital?

15.28%
	12.40%
	11.64 %
	13.00%

S'more Fest Enterprises has the following project that it can invest $30,000 today. The project will generate $9,000, $10,000; $8,000; $12,000; and $13,000 in 5 years respectively. What is their payback period?

Question options:

	4.12 years
	3.25 years
	3.0 years
	5.06 years

Answer 1

A)Correct option is "C"- 11.64%

	Cost	Proportion	weights	Cost *weight
After tax cost of Debt	8(1-.21) = 6.32%	45000	45000/100000=.45	6.32*.45=2.84
common stock	16%	55000	55000/100000=.55	16*.55= 8.8
		100000		11.64%

B)Correct option is "B"- 3.25 years

Year	Cash Flow	Cumulative cash flow
0	-30000	-30000
1	9000	-30000+9000=-21000
2	10000	-21000+10000=-11000
3	8000	-11000+8000=-3000
4	12000	-3000+12000=9000
5	13000	9000+13000=22000

Payback period =year up to which cumulative cash flow is negative +(cumulative cash flow of that period /cash flow of next year)

= 3+ (3000/12000)

= 3 + .25

   = 3.25 years