Part 1 1 Peter Johnson, the CFO of Homer Industries, Inc is trying to determine the Weighted Cost of Capital (WACC) based on two different capital structures under consideration to fund a new project. Assume the company's tax rate is 30%. Component Debt Cost of Capital 8% Scenario 1 Scenario 2 Tax Rate $5,000,000.00 1,200,000.00 1,800,000.00 $8,000,000.00 $2,000,000.00 2,200,000.00 3,800,000.00 $8,000,000.00 30% Preferred Stock Common Stock 10% 13% Total 1-a. Complete the table below to determine the WACC for each of the two capital structure scenarios. (Enter your answer as a whole percentage rounded to 2 decimal places (e.g. .3555 should be entered as 35.55).) Scenario 1 Weight % Scenario 2 Weight % Scenario 1 Weighted Cost Weighted Cost Cost of Capital Scenario 2 Tax Rate Debt 8% 30% Preferred Stock 10% Common Stock 13% Total 1-b. Which capital structure shall Mr. Johnson choose to fund the new project? O Scenario 1. O Scenario 2

Part 1 1 Peter Johnson, the CFO of Homer Industries, Inc is trying to determine the Weighted Cost of Capital (WACC) based on two different capital structures under consideration to fund a new project. Assume the company's tax rate is 30%. Component Debt Cost of Capital 8% Scenario 1 Scenario 2 Tax Rate $5,000,000.00 1,200,000.00 1,800,000.00 $8,000,000.00 $2,000,000.00 2,200,000.00 3,800,000.00 $8,000,000.00 30% Preferred Stock Common Stock 10% 13% Total 1-a. Complete the table below to determine the WACC for each of the two capital structure scenarios. (Enter your answer as a whole percentage rounded to 2 decimal places (e.g. .3555 should be entered as 35.55).) Scenario 1 Weight % Scenario 2 Weight % Scenario 1 Weighted Cost Weighted Cost Cost of Capital Scenario 2 Tax Rate Debt 8% 30% Preferred Stock 10% Common Stock 13% Total 1-b. Which capital structure shall Mr. Johnson choose to fund the new project? O Scenario 1. O Scenario 2

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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K aces You need to estimate the value of Laputa Aviation. You have the following forecasts (in millions of dollars) of its profits and of its future investments in new plant and working capital: Earnings before interest, taxes, depreciation, and amortization (EBITDA) Depreciation Pretax profit Tax at 30% Investment a. Total value b. Laputa's equity $77 27 50 15 15 S S Year 627 313 2 $ 97 37 60 18 18 3 $ 112 42 70 21 21 From year 5 onward, EBITDA, depreciation, and investment are expected to remain unchanged at year-4 levels. Laputa is financed 50% by equity and 50% by debt. Its cost of equity is 14%, its debt yields 10%, and it pays corporate tax at 30%. 4 $ 117 47 a. Estimate the company's total value. Note: Do not round intermediate calculations. Enter your answer in millions rounded to the nearest whole amount. b. What is the value of Laputa's equity? Note: Do not round intermediate calculations. Enter your answer in millions rounded to the nearest whole amount. 70 21 23
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Assignment: Chapter 11 Cost of Capital Attempts 2. An overview of a firm's cost of debt Keep the Highest/3 To calculate the after-tax cost of debt, multiply the before-tax cost of debt by Three Waters Company (TWC) can borrow funds at an interest rate of 12.50% (2+T)od of four years. Its marginal federal-plus-state tax rate is 40%. TWC's after-tax cost of debt is (rounded to two decimal(1-T) At the present time, Three Waters Company (TWC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,278.41 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. The company incurs a federal- plus-state tax rate of 40%. If TWC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to tw decimal places)? O4.22% O 3.80 % O 5.06% 4.85%
devuben
2-b. Shall the company accept or reject this project based on the outcome using the net present value (NPV) method?
Mansukh
Problems 1. The capital investment committee of Taiwan Semiconductor Company is considering two capital investments. The estimated income from operations and net cash flows from each investment are as follows: 123 45 Year Total Lithography Machine Income from Operations $26,000 21,000 7,000 4,000 Problem 1 Instructions 1,450 $59,450 Net Cash Flow a. Compute the following: i. ii. $41,000 35,000 22,500 18,000 16,150 $132,650 Photoresist Machine Income from Operations $12,250 12,250 12,250 12,250 12,250 $61,250 Net Cash Flows Each project requires an investment of $75,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis. $25,250 25,250 25,250 25,250 25,250 $126,250 The average rate of return for each investment. The net present value for each investment. Use the present value of $1 table appearing in this chapter (Exhibit 2). (Round present values to the nearest dollar.) b.…
Question 3: CLO 3 Capital Investment Decision a) Shunt Technology will spend $800,000 on a piece of equipment that will manufacture fine wire for the electronics industries. The shipping and installation charges will be $240,000 and net working capital will increase $48,000. Theequipment will replace an existing machine that has a salvage value of $75,000 and a book value of $125,000. If Shunt has a current marginal tax rate of 34 percent, what is the net investment?
Q No. 1 Assume that you are given assignment to evaluate the capital budgeting projects of the company which is considering investing in two coal projects, “Thar Coal Project” and “Sahiwal Coal Project”. The initial cost of each project is Rs. 10000 Million. Company discounts all projects based on WACC. Further, all the projects are equally risky projects, and the company uses only debt and common equity for financing these projects. It can borrow unlimited amounts at after tax interest rate of rd 5% as long as it finances at its target capital structure, which calls for 50% debt and 50% common equity. The dividend for next period is Rs 4.0, its expected that they will grow at the constant growth rate of 8%, and the company’s common stock sells for 40. The tax rate is 50%. The cash flows of both the projects are given in table below: Time Thar Coal Project Cashflows (amount in Rs. Millions) Sahiwal Coal Project Cashflows (amount in Rs. Millions)0 - 10,000 - 10,0001 6,500 3,5002 3,000…
Question 4 Mooradian Corporation estimates that its weighted average cost of capital is 17.8 percent. The company is considering two mutually exclusive projects whose after-tax cash flows are as follows: Year 0 1 2 3 4 O 42.11%; Yes O 43.11%; Yes What is the modified internal rate of return (MIRR) of the project with the highest NPV? Should this project be accepted? 44.11%; No 45.11%; Yes Project S CF ($3,172) $2,950 $2,766 $1,990 $1,931 O 45.11%; No Project L CF ($4,938) $1,552 $2,468 $4,409 $2,035

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