Finance Assignment | homework help websites
December 12th, 2018
Part I Short Answer/Discussion
- Why is there a cost for reinvested (retained) earnings?
- What are the three ways to determine the cost of equity?
- If you use book value weights to compute a firm’s weighted average cost of capital (WACC), would the WACC be lower or higher than one computed using market value weights? Explain your answer.
- List and briefly explain the four mistakes to avoid when computing a firm’s WACC.
- Under what conditions would a project have more than one IRR? How would you reconcile this problem?
- Explain why there could be a conflict between the IRR and NPV of a project?
- When calculating the cash flow of a project, should you subtract the cost of financing the project? Why or why not?
- List and briefly explain the three types of risk that are relevant to capital budgeting.
- Why is it important to consider real options in capital budgeting? What are some types of real options?
- List and briefly explain the primary types of leases.
- List and briefly explain the common methods of estimating growth rates.
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- A company’s perpetual preferred stock currently sells for $92.50 per share, and it pays a $7.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the issue price. What is the firm’s cost of preferred stock?
- Kelley, Inc. has the following data: rRF = 3.00%; RPM = 5.50%; and b = 1.05. What is the firm’s cost of common equity from reinvested earnings based on the CAPM?
- As a consultant to Saban, Inc., you have been provided with the following data: D1 = $0.50; P0 = $30.00; and g = 7.00% (constant). What is the cost of common equity from reinvested earnings based on the DCF approach?
- Dabo Company’s target capital structure is 40% debt, 10% preferred, and 50% common equity. The after-tax cost of debt is 5.00%, the cost of preferred is 7.50%, and the cost of common using reinvested earnings is 12.00%. The firm will not be issuing any new stock. You were hired as a consultant to help determine its cost of capital. What is its WACC?
- Harris Electric Company’s noncallable bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm’s tax rate is 21%, what is the component cost of debt for use in the WACC calculation?
- Tua Baking Co. common stock sells for $32.50 per share. It expects to earn $3.50 per share during the current year; its expected dividend payout ratio is 65%, and its expected constant dividend growth rate is 6.0%. New stock can be sold to the public at the current price, but a flotation cost of 3% would be incurred. What would be the cost of equity from new common stock?
- Murray, Co. is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Note that a project’s expected NPV can be negative, in which case it will be rejected.
- Haskins Electronics is considering a project that has the following cash flow data. What is the project’s IRR? Note that a project’s IRR can be less than the WACC (and even negative), in which case it will be rejected.
- Jeudy’s Computer Consultants Inc. is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s MIRR can be less than the WACC (and even negative), in which case it will be rejected.
- Waddle’s Car Wash Inc. is considering a project that has the following cash flow and WACC data. What is the project’s discounted payback?
- Cochran Inc., the company you work for, is considering a new project whose data are shown below. What is the project’s Year 1 cash flow?
|Sales revenues, each year||$62,500|
|Other operating costs||$30,000|
- McLeod Inc. is considering an investment that has an expected return of 15% and a standard deviation of 10%. What is the investment’s coefficient of variation?
- Locksley Film Co. is selling off some old equipment it no longer needs because its associated project has come to an end. The equipment originally cost $22,500, of which 55% has been depreciated. The firm can sell the used equipment today for $5,000, and its tax rate is 21%. What is the equipment’s after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment’s final market value is less than its book value, the firm will receive a tax credit as a result of the sale.
- Meyer Retirement (Again) Company (MTC) is evaluating the merits of leasing versus purchasing a truck with a 4-year life that costs $80,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 8%, and the loan would be amortized over the truck’s 4-year life, so the interest expense for taxes would decline over time. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $25,000. If MTC buys the truck, it would purchase a maintenance contract that costs $1,500 per year, payable at the beginning of each year. The lease terms, which include maintenance, call for a $19,000 lease payment (4 payments total) at the beginning of each year. MTC’s tax rate is 21%. What is the net advantage to leasing? (Note: Assume MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.15, and 0.07 respectively and round all dollar to the nearest whole number.)