Question

PROBLEM 1

Calculate:

a) aftertax cost of debt (Kd)

b) cost of preferred stock (Kp)

c) cost of common equity in the form of retained earnings (Ke)

Use the following information:

- Bond Face Value = $1,000

- Bond coupon rate = 7%, bond pays interest annually

- current bond price = $1,020

- time to maturity = 18 y

- tax rate = 35%

- price, preffered stock = $90

- dividend, preffered stock= $8.10

- price, common stock = $8.10

- dividend, common stock =$3.50

- dividend growth rate, common stock = 5%

PROBLEM 2

Company's capital structure consists of debt(35%), preferred stock(10%) and common equity(55%). Aftertax cost of debt is 5.5% (Kd), cost of preferred stock is 8%(Kp), and cost of common equity in the form of retained earnings is 12%(Ke). Calculate the weighted average cost of capital.

PROBLEM 3

If the company currently has $40 million in debt, which represents 25% of the capital structure , at which size capital structure will the company have to add more debt?

PROBLEM 4

A company is considering to spend $650,000 to buy new equipment, which has ADR midpoint of 4 years.

a) Which MACRS class does this asset fall under, and how many years of depreciation will it have until fully depreciated?

b) Prepare a depreciation schedule, that is - calculate annual depreciation expense

c) use your answer from part b depreciation schedule, to calculate annual cash flows. tax rate is 40%, and annual earnings before depreciation and taxes for the next four years are:

Year 1 - EBDT(1) $366,450, Year 2 - EBDT(2) $429,250, Year 3 - EBDT(3) $206,200, Year 4 - EBDT(4) $168100

PROBLEM 5

A company is considering purchasing an asset for $650,000. This asset will produce annual cash flows of $290,000; $308,000; $157,000; $96,500 in the next 4 years.

a) calculate the internal rate of return(IRR). WRITE OUT ALL CACULATOR ENTRIES.

b) if the cost of capital for the company is 14%, should they purchase this asset? why?

c) company's cfo believes that purchasing this asset is risky. and requires a higher discount rate of 16% to be applied for the NPV analysis. Caluclate the NPV.

WRITE OUT ALL CALCULATOR ENTRIES.

d) based on you calculated NPV should the company purchase this asset? why?

PROBLEM 6

This Problem outcomes for sales of a new product(in the thousands of $) and their probabilites are as follows:

	Sales Outcome	Probability
Low	$120	0.3
Medium	$180	0.3
High	$400	0.4

a) calculate the expected value of sales.

b) calculate the standard deviation

c) calculate the coefficient of variation

Answer 1