Chapter 8 A1 (Calculating the WACC) The required return on ...



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Chapter 8 A1 (Calculating the WACC) The required return on debt is 8%,the required return on equity is 14% and the marginal tax rate is 40%.If the firm is financed 70%equity and 30%debt.What is the weighted average cost capital.

L = D / (D + E) = 30% / (30% + 70%) = 0.30

WACC = (1 - L)re + L(1 - T)rd

WACC = (1 - 0.30) x 14% + 0.30(1 - 0.40) x 8% = 11.24%

Chapter 8 B5 (Evaluating investments with differing risks). You are considering three stocks for investment process. The required return on the market portfolio is 14% and the riskless return is 9%.Baiced on the information given, in which (if any) of these stocks should you invest. Stock Beta Current price Last dividend Growth rate A 1.3 $ 15 $ 1.2 5% B 0.9 28 1.3 10 C 1.1 31 2.4 8

r = rf + β(rm - rf)

P0 = D1 / (r - g) = D0(1 + g) / (r - g)

rA = 9% + 1.3(14% - 9%) = 15.5%

PA = $1.20(1 + 0.05) / (0.155 - 0.05) = $12.00

Since the current market price is $15, do not invest.

rB = 9% + 0.9(14% - 9%) = 13.5%

PB = $1.30(1 + 0.10) / (0.135 - 0.10) = $40.86

Since the current market price is $28, invest.

rC = 9% + 1.1(14% - 9%) = 14.5%

PC = $2.40(1 + 0.08) / (0.145 - 0.08) = $39.88

Since the current market price is $31, invest.

Chapter 9 A6 (Pay back and discounted payback) find the payback and discounted payback for a project with the cash flows given here. The cost capital is 12% Year 0 1 2 3 4 Cash flow -10 3 3 4 6

Payback: $3 + $3 + $4 = $10

Payback = 3 years

Discounted Cash Flows:

PVCF1 = $3 / (1 + 0.12)1 = $2.68

PVCF2 = $3 / (1 + 0.12)2 = $2.39

PVCF3 = $4 / (1 + 0.12)3 = $2.85

PVCF4 = $6 / (1 + 0.12)4 = $3.81

$2.68 + $2.39 + $2.85 = $7.92

$10 - $7.92 = $2.08

Discounted Payback = 3 + $2.08 / $3.81 = 3.55 years

Chapter 9 B4 (NPV and shareholder) Stockholders are surprised to learn that the firm has invested $43M. in project that has unexpected payoff of $8M. per year for six years. The project cost of capital is 12%. a. What is the project ‘s NPV b. There are $3 M. outstanding shares. What should be direct impact of this investment on the per-share value of the common stock?

a. CALC: n = 6 r = 12% PV = ? PMT = $8.0 FV = 0 PV = -$32.89

NPV = -$43 + $32.89 = -$10.11 million

b. -$10.11 / 3 = -$3.37 per share.

Chapter 10 B5 ( Cash flows and NPV for the new project) Syracuse Road building Company is considering the purchase of a new tandem box dump truck. The truck costs 95000 and additional$5000 is need it to paint with the firm logo and instant ratio equipment. Assume the truck falls into the MACRS three- year class. The truck will generate no additional revenues, but will reduce cash operating expenses by $35000 per year. The truck will be sold for $40000 after its five- year life. An inventory investment of $ 4000 is required during the life investment. Syracuse Road building is in the %45 income tax bracket. a. What is the net investment. b. What is the after tax net operating cash flow for each of the five years?? c. What is the after tax salvage value??? d. What is the NPV of this investment??

a. Net Investment Outlay = -I - ΔW + S - T(S - B)

Net Investment Outlay = -($95,000 + $5,000 x (1 - 0.45)) - $4,000 = -$101,750

b. CFAT1 = (ΔR - ΔE)(1 - T) + TΔD = ($0 - -$35,000)(1 - 0.45) + 0.45(.20 x $95,000) = $27,800.00

CFAT2 = (ΔR - ΔE)(1 - T) + TΔD = ($0 - -$35,000)(1 - 0.45) + 0.45(.320 x $95,000) = $32,930.00

CFAT3 = (ΔR - ΔE)(1 - T) + TΔD = ($0 - -$35,000)(1 - 0.45) + 0.45(.1920 x $95,000) = $27,458.00

CFAT4 = (ΔR - ΔE)(1 - T) + TΔD = ($0 - -$35,000)(1 - 0.45) + 0.45(.1152 x $95,000) = $24,174.80

CFAT5 = (ΔR - ΔE)(1 - T) + TΔD = ($0 - -$35,000)(1 - 0.45) + 0.45(.1152x $95,000) = $24,174.80

c. Net Salvage Value = S -T(S - B) - (1 - T)REX + ΔW

Net Salvage Value = $40,000 - 0.45($40,000 - .0576 x $95,000) + $4,000 = $28,462.40

d. NPV = -$101,750 + $27,800 / 1.101 + $32,930 / 1.102 + $27,458 / 1.103 +

$24,174.80 / 1.104 + $24,174.80 / 1.105 + $28,462.40 / 1.105

NPV = $20,562.48

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