The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below. Assets $ 38,000,000 101.000.000 $139.000.000 Current assets Net plant, property, and equipment Total assets Liabilities and Equity. Accounts payable S 10,000,000 9.000,000 $ 19,000,000 40,000,000 S 59,000,000 30,000,000 50,000.000 80.000,000 $139.000.000 Accruals Current liabilities Long-term debt (40,000 bonds, S1,000 par value) Total liabilities Common stock (10,000,000 shares) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50% The required returm on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 40%. Answer each of the Questions in the two and a half hours permitted.
The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below. Assets $ 38,000,000 101.000.000 $139.000.000 Current assets Net plant, property, and equipment Total assets Liabilities and Equity. Accounts payable S 10,000,000 9.000,000 $ 19,000,000 40,000,000 S 59,000,000 30,000,000 50,000.000 80.000,000 $139.000.000 Accruals Current liabilities Long-term debt (40,000 bonds, S1,000 par value) Total liabilities Common stock (10,000,000 shares) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50% The required returm on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 40%. Answer each of the Questions in the two and a half hours permitted.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below.
Assets
$ 38,000,000
101,000,000
$139,000,000
Current assets
Net plant, property, and equipment
Total assets
Liabilities and Equity
Accounts payable
$ 10,000,000
9,000,000
$ 19,000,000
40,000,000
$ 59,000,000
Accruals
Current liabilities
Long-term debt (40,000 bonds, S1,000 par value)
Total liabilities
Common stock (10,000,000 shares)
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
30,000,000
_50,000,000
_80,000,000
$139,000,000
The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%.
The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 40%.
Answer each of the Questions in the two and a half hours permitted.
Transcribed Image Text:Consider two mutually exclusive projects A and B, each with normal cash flows that are negative at time zero and positive thereafter. Project A has an IRR of 18% and project B has an IRR of 15%. If the required rate of return was 10% the two porjects would have equal net present value. However, the required rate
of return is 8%, so which project, if any, should be adopted?
Adopt A since it has the higher IRR.
Adopt A since it has the higher NPV.
Adopt B since it has the higher NPV.
Adopt either project since the NPV is the same for both projects.
Reject both projects since the required return is less than both projects IRR.
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