Project #86771 - Finance



1. Company XYZ’s financing plans for next year include the sale of bonds with a 10% coupon rate. The company believes it can sell the bonds at a price that will provide a yield to maturity (YTM) of 12%. If the company’s marginal tax rate is 35%, what’s the company’s after-tax cost of debt capital?





2. Company ABC just financed with a 30-year bond issuing today. The bond sold at $515.16 with semiannual coupon payments. The coupon rate is 6%. Par value is $1000. If ABC’s marginal tax rate is 40%, what is the firm’s component cost of debt for purpose of calculating its WACC?







3. Firm A will issue new preferred stock at $100 which pays $10 per share each year. The floatation cost is 2.5% of the issuing price. Firm A’s marginal tax rate is 40%. What’s the after-tax cost of preferred stock?







4. Assume rf = 8%, rm = 13%, and bi = 0.7 for a given stock X. Firm X has a tax rate of 40%. What’s the after-tax cost of equity for this firm?






5. The current stock price of firm A is $50. The dividend of the stock will grow at 8% annually. Firm A has just paid a dividend of $1.852. Firm A’s marginal tax rate is 40%. What’s the cost of equity of firm A?







6. Suppose Firm B has its target capital structure as follows. Firm B has a tax rate of 40%.

            Instrument                                  Market Value ($mil.)                                Cost of capital

            debt                                                      45                                             10%

            preferred Stock                                        2                                              10.3%

            common equity                                       53                                             13.4%


What’s the WACC (Weighted Average Cost of Capital)?







Capital Budgeting Decision Rules


1. Payback period approach in capital budgeting evaluation process fails to consider all cash flows and the time value of money.


True                             False


2. If a project’s NPV is positive, then it is IRR is greater than its cost of capital.


True                             False


A project will cost $160,000. The after-tax future cash flows are expected to be $40,000 annually for 7 years. For #3-5.


3. What is the project’s payback period?


A. 1.5 yrs         B. 2.0 yrs         C. 3.3 yrs         D. 4.0 years     E. 4.3 years


4. Assume the required return is 10%. What is the project’s NPV?


A. $14,111      B. $27,322       C. $32,556       D. $34,737      E. $45,001


5. Assume the required return is 17%. What is the project’s IRR? Accept?


A.    12.2%; yes

B.    12.2%; no

C.    16.3%; yes

D.    16.3%; no

E.    17.0%; indifferent



6. XYZ company is planning to buy the ABC company. The acquisition would require an initial investment of $190,000, but in one year XYZ company's after-tax net cash flows would increase by $24,000 and remain at this new level annually forever. Assume a cost of capital of 10 percent. Should XYZ buy ABC?


Subject Business
Due By (Pacific Time) 10/13/2015 04:00 pm
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