**WACC**

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 r_{f} = 8%, r_{m} = 13%, and b_{i} = 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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