Question

Suppose your company is financed 20% with debt and 80% with common stock.

a. If the cost of new borrowing will be 5% and the cost of equity is 12%, what is the cost of capital to your company if the applicable tax rate is 30%?

b. If you were to invest in a project that has a zero NPV, what rate of return would you be earning on the project?

c. If you were to invest in a project that has a zero NPV, what rate of return would you be earning on the portion of the funds provided by the stockholders?

Answer #1

All answers are attached below

As manager of ACME industries, your company is 30% debt
financed, 70% equity financed. Assuming the debt is risk-free, and
assuming that your equity beta is 1.1, that treasury bills yield
1%, and that the market has an expected return of 8%, what is your
weighted average cost of capital assuming a 35% tax rate? Should
you invest in a new project with a 10% IRR?

7. A firm is financed with 20% long-term debt and 80% common
stock. Assume that the estimated cost of equity is 15% and the cost
of comparable debt is 5%. The corporate tax rate is 40%. Compute
the WACC.

Suppose your company needs $24 million to build a new assembly
line. Your target debt?equity ratio is .60. The flotation cost for
new equity is 7 percent, but the flotation cost for debt is only 3
percent. Your boss has decided to fund the project by borrowing
money because the flotation costs are lower and the needed funds
are relatively small.
What do you think about the rationale behind borrowing the
entire amount?
What is your company’s weighted average flotation...

Suppose a firm financed a $150 million perpetual debt and with
10 million shares each worth $1. The expected return on the debt is
8% and the expected return on equity is 16%. The tax rate is 40%.
What is the company's cost of capital financed with debt and what
is the value of the firm if it were solely financed by equity?

A
company is financed with a combination of 55% equity and 45% debt.
The company has a beta of 1.75. The risk free rate is 4% and the
market rate of return is 16%. The debt is currently being traded in
the market is 8.5%. The company tax free rate is 35%. With all
these data, answer the following questions:
1. What is the company’s afteer tax cost of debt
2.what is the company’s cost of equity
3. What is...

1. A company is financed 60% by debt and 40% by equity. The
pre-tax cost of debt is currently 10%. The Finance Director has
stated that the weighted average cost of capital for the company is
9.6%. What is the cost of equity? Assume the tax rate is
40%.
2. What weakness does the NPV method have that is not present in
the payback method?
Group of answer choices:
a Initial cash flows are ignored.
b The NPV method is...

Assume that a company is 35% debt and 65% equity financed. The
company has a 10% cost of equity and 8% after-tax cost of debt. It
considers undertaking a project which has a life of 5 years. If the
cash flows of the project are, on the average, spread evenly over
the life of the project, the optimal cutoff period is closest
to:
Select one:
a. 3.9 years
b. 4.2 years
c. 5.1 years
d. 6.1 years

Assume that a company is 35% debt and 65% equity financed. The
company has a 10% cost of equity and 8% after-tax cost of debt. It
considers undertaking a project which has a life of 5 years. If the
cash flows of the project are, on the average, spread evenly over
the life of the project, the optimal cutoff period is closest
to:
Select one:
a. 3.9 years
b. 4.2 years
c. 5.1 years
d. 6.1 years

Kirk Limited, an automobile company financed by both debt and
equity, is undertaking a new project. If the project is successful,
the value of the firm in one year will be $100,000, but if the
project is a failure, the firm will be worth only $20,000. The
current value of Kirk is $50,000, a figure that includes the
prospects for the new project. Kirk has outstanding zero coupon
bonds due in one year with a face value of $40,000. Treasury...

ABS Limited, an automobile company financed by both debt and
equity, is undertaking a new project. If the project is successful,
the value of the firm in one year will be $150,000, but if the
project is a failure, the firm will be worth only $50,000. The
current value of ABS is $100,000, a figure that includes the
prospects for the new project. ABS has outstanding zero coupon
bonds due in one year with a face value of $85,000. Treasury...

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