Question

A company has two separate projects A and B. Project A has less risk than Project B and company requires WACC plus 0.5 percent return for Project A. Project B has more risk and the firm asks its WACC plus 1 percent return. The company has a debt-equity ratio of .45. The company’s cost of equity is 14.7 percent and the after-tax cost of debt is 5.1 percent. If you expect 11.64 percent rate of return from project A and 12.30 percent return from project B, what should be your decision? The company’s tax rate is 35%.

Answer selection is as follows:

A) Reject both

b) Accept B and reject A

c) Accept A and reject B

d) Accept both

Answer #1

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Adamson Corporation is considering four average-risk projects
with the following costs and rates of return:
Project Cost Expected Rate of Return
1 $2,000 16.00%
2 3,000 15.00
3 5,000 13.75
4 2,000 12.50
The company estimates that it can issue debt at a rate of rd =
11%, and its tax rate is 25%. It can issue preferred stock that
pays a constant dividend of $4.00 per year at $51.00 per share.
Also, its common stock currently sells for $36.00...

Piedmont Hotels is an all-equity company. Its stock has a beta
of 1.17. The market risk premium is 6.6 percent and the risk-free
rate is 2.4 percent. The company is considering a project that it
considers riskier than its current operations so it wants to apply
an adjustment of 1.6 percent to the project's discount rate. What
should the firm set as the required rate of return for the
project?
Multiple Choice
8.52%
8.91%
10.12%
7.31%
11.72%
Bermuda Cruises issues...

Adamson Corporation is considering four average-risk projects
with the following costs and rates of return:
Project
Cost
Expected Rate of Return
1
$2,000
16.00%
2
3,000
15.00
3
5,000
13.75
4
2,000
12.50
The company estimates that it can issue debt at a rate of
rd = 9%, and its tax rate is 25%. It can issue preferred
stock that pays a constant dividend of $6.00 per year at $53.00 per
share. Also, its common stock currently sells for $38.00...

Adamson Corporation is considering four average-risk projects
with the following costs and rates of return:
Project
Cost
Expected Rate of Return
1
$2,000
16.00%
2
3,000
15.00
3
5,000
13.75
4
2,000
12.50
The company estimates that it can issue debt at a rate of
rd = 10%, and its tax rate is 40%. It can issue
preferred stock that pays a constant dividend of $4 per year at $42
per share. Also, its common stock currently sells for $36...

You are considering two independent projects. The required rate
of return is 13.75 percent for Project A and 14.25 percent for
Project B. Project A has an initial cost of $51,400 and cash
inflows of $21,400, $24,900, and $22,200 for Years 1 to 3,
respectively. Project B has an initial cost of $38,300 and cash
inflows of $18,000 a year for 3 years. Which project(s), if any,
should you accept?
A.
Reject both Projects.
B.
Accept both projects.
C.
Accept...

Target Corp has a current price of
$73. It also has 521 million shares outstanding and the market
value of debt is $11,317 million. The company’s equity beta is
0.72. Its tax rate is 20%. Assume that the risk-free rate is 2.5%
and the market return is 10%. The company’s cost of debt is 4.2%.
Compute the weighted average cost of capital (WACC) for Target
Corp.If an investment
project.generates a return of 10% and has similar risk level as...

Problem 10-18
WACC and optimal capital budget
Adams Corporation is considering four average-risk projects with
the following costs and rates of return:
Project
Cost
Expected Rate of
Return
1
$2,000
16.00%
2
3,000
15.00
3
5,000
13.75
4
2,000
12.50
The company estimates that it can issue debt at a rate of rd =
10%, and its tax rate is 30%. It can issue preferred stock that
pays a constant dividend of $3 per year at $60 per share. Also,...

Subject WACC AND OPTIMAL CAPITAL BUDGET
Adamson Corporation is considering four average-risk projects
with the following costs and rates of return:
Project
Cost
Expected Rate of Return
1
$2,000
16.00%
2
3,000
15.00
3
5,000
13.75
4
2,000
12.50
The company estimates that it can issue debt at a rate of
rd = 9%, and its tax rate is 30%. It can issue preferred
stock that pays a constant dividend of $6 per year at $52 per
share. Also, its...

Do a seven year project valuation given the information
below.
Required return: WACC+1.5 percent
Initial investment: $7.4 million
Yearly cash inflow: $1.54 million
Cost of debt (pre-tax): 8.6%
Cost of equity: 13.7%
Debt-equity ratio:.0.65
Corporate tax rate: 35%
Use NPV for the decision
Answer choices are as follows:
A) Accept because its NPV is $446,328
B) Reject because its NPV is -$372,963
C) Reject because its NPV is -$446,328
D) Accept because its NPV is $235,738

Bam Corporation is considering the following independent
projects for the coming year. Their target capital structure is 60
percent debt and 40 percent equity. The after-tax cost of debt is 6
percent and the cost of equity is 15 percent.
Expected
Required
Rate
of
Risk
Project
Investment
Return
Level
A
$13
million
17%
High
B
16 million
9
Low
C
25 million
14
Average
D
...

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