# Project #78309 - Problems Capital Structure

Problem Assignments and Solutions - Capital Structure

Calculate the correct answer in all problems
USE NPV, Rate, and IRR Functions as appropriate in Problems 4b, 4d. 4e, 5, and 8
Explain in words what you do to make each calculation
Explain in words what the answers mean
Points
1
10

Answer: Cost of debt after tax is   2.60%
Cost of retained earnings is   6.85%

2-A               3

Answer: The cost of equity is 17.25%

2-B
7

3 A company, West  Berwick Enterprises, has a capital structure as follows:
Total Capital \$1,000,000
Debt   \$400,000
Preferred Stock \$100,000
Common Equity \$500,000

15

Cost of debt after tax is 4.20%
Cost of preferred stock is 5.94%
Cost of common stock is 10.24%
WACC is   7.39%

4

Net Cash Flow
Year Project A Project B
0 -\$4,000,000 -\$5,000,000
1 \$800,000 \$1,900,000
2 \$1,000,000 \$1,700,000
3 \$1,200,000 \$1,400,000
4 \$1,400,000 \$900,000
5 \$1,600,000 \$300,000

4-A Calculate the payback period for each project.
Project A Project B
Answer: 3.71 3.00 Payback Period in years.     6

4-B Calculate the net present value for each project.
Project A Project B

4-C Which project do you think will be approved, if only one project can be approved? Why?
Project A Project B

4-D What if the required rate of return was 10%?
\$404,989.72 (\$14,939.37) Net Present Value       6
Yes No

4-E What is the Internal rate of return?
Answer: Project A Project B           6
13.45% 9.85%

4-F Which is the best to use for deciding:  Payback, NPV or IRR?  Why?     8

5

6

6-A
6

6-B
6

7

6

11.99%
8

6

Total Points 100

 Subject Business Due By (Pacific Time) 08/15/2015 12:00 am
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