Question

1. AMJ, Inc., currently borrows 29.00% of its funds.
The interest rate on its debt is 7.80%. AMJ's
required rate of return on equity is 17.10%, and its
marginal tax rate is 37.00%. Determine AMJ's
weighted average cost of capital.

2. VFS, Inc., which has a beta on its stock of 0.9,
borrows 31.00% of its funds; its interest rate on its debt
is 7.90%. VFS's marginal tax rate is 37.00%.
Determine VFS's weighted average cost of capital. Assume
the expected return on the market is 12.80% and the
riskfree return is 7.30%.

3. URD, Inc., is considering a typical project that has an internal
rate of return of 9.30%. URD's marginal tax rate is 37.00%
and the beta on its stock is 1.1. URD raises 77.00% of its funds
from equity, borrowing the rest at an interest rate of 7.20%.
The riskfree return is 6.80% and expected return on the market
is 13.80%.

a. What is the required rate of return for this project?

b. Should URD invest in this project (Yes or No)

4. YBZ, Inc., is considering a typical project that costs $43,000 now
and will result in net cash inflows $5,800 one year from now, $6,800
two years from now, and $7,800 three years from now. There are no
other cash flows. The riskfree return on YBZ is 6.90%, whereas YBZ
pays 7.20% on its debt. YBZ borrows 27.00% of its funds. The marginal
tax rate for YBZ is 37.00% and the beta on YBZ's stock is 1.3.
Assume the expected return on the market is 13.80%.

a. What is the required rate of return on this project?

b. What is the NPV of this project?

c. Should YBZ invest in this project? (Yes or No)

Answer 1

Only 1 question per submission is allowed to be answered.

Cost of Debt	7.80%
Tax rate	37%
Post tax cost of debt=	=7.80%*(1-37%)
	4.914%
Component	Weight	Cost	Weighted Cost-Weight*Cost
Debt	29%	4.914%	1.425%
Equity	71%	17.10%	12.141%
		Total	13.566%
WACC= 13.566%