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Question;Finance Problems;Cost;of Equity. Diddy Corp. has a beta of 1.2, the current risk-free rate is 5;percent, and the expected return on the market is 13.5 percent. What is Diddy?s;cost of equity?Cost;of Debt. Oberon Inc. has a $20 million (face value) 10-year bond issue selling;for 97 percent of par that pays an annual coupon of 8.25 percent. What would be;Oberon?s before-tax component cost of debt?Tax;Rate. Suppose that LilyMac Photography expects EBIT to be approximately;$200,000 per year for the foreseeable future, and that it has 1,000 10-year, 9;percent annual coupon bonds outstanding. What would the appropriate tax rate be;for use in the calculation of the debt component of LilyMac?s WACC?Cost;of Preferred Stock. ILK has preferred stock selling for 97 percent of par that;pays an 8 percent annual coupon. What would be ILK?s component cost of;preferred stock?Weight;of Equity. FarCry Industries, a maker of telecommunications equipment, has 2;million shares of common stock outstanding, 1 million shares of preferred stock;outstanding, and 10,000 bonds. If the common shares are selling for $27 per;share, the preferred shares are selling for $14.50 per share, and the bonds are;selling for 98 percent of par, what would be the weight used for equity in the;computation of FarCry?s WACC?Weight;of Equity. OMG Inc. has 4 million shares of common stock outstanding, 3 million;shares of preferred stock outstanding, and 5,000 bonds. If the common shares;are selling for $17 per share, the preferred shares are selling for $26 per;share, and the bonds are selling for 108 percent of par, what would be the;weight used for equity in the computation of OMG?s WACC?WACC.;Suppose that JB Cos. has a capital structure of 78 percent equity, 22 percent;debt, and that its before-tax cost of debt is 11 percent while its cost of;equity is 15 percent. If the appropriate weighted-average tax rate is 25;percent, what will be JB?s WACC?WACC.;Suppose that B2B Inc. has a capital structure of 37 percent equity, 17 percent;preferred stock, and 46 percent debt. If the before-tax component costs of;equity, preferred stock, and debt are 14.5 percent, 11 percent, and 9.5;percent, respectively, what is B2B?s WACC if the firm faces an average tax rate;of 30 percent?WACC.;Johnny Cake Ltd. has 10 million shares of stock outstanding selling at $23 per;share and an issue of $50 million in 9 percent annual coupon bonds with a;maturity of 17 years, selling at 93.5 percent of par. If Johnny Cake?s;weighted-average tax rate is 34 percent, its next dividend is expected to be $3;per share, and all future dividends are expected to grow at 6 percent per year;indefinitely, what is its WACC?WACC;Weights. BetterPie Industries has 3 million shares of common stock;outstanding, 2 million shares of;preferred stock outstanding, and 10,000 bonds. If the common shares are selling;for $47 per share, the preferred shares are selling for $24.50 per share, and;the bonds are selling for 99 percent of par, what would be the weights used in;the calculation of BetterPie?s WACC?After-Tax;Cash Flow from Sale of Assets. Suppose you sell a fixed asset for $109,000 when;its book value is $129,000. If your company?s marginal tax rate is 39 percent;what will be the effect on cash flows of this sale (i.e, what will be the;after-tax cash flow of this sale)?EAC;Approach. You are trying to pick the least-expensive car for your new delivery;service. You have two choices: the Scion xA, which will cost $14,000 to;purchase and which will have OCF of -$1,200 annually throughout the vehicle?s;expected life of three years as a delivery vehicle, and the Toyota Prius, which;will cost $20,000 to purchase and which will have OCF of -$650 annually throughout;the vehicle?s expected life of 4-year life. Both cars will be worthless at the;end of their life. If you intend to replace whichever type of car you choose;with the same thing when its life runs out, again and again out into the;foreseeable future, and if your business has a cost of capital of 12 percent;which one should you choose?EAC;Approach. You are considering the purchase of one of two machines used in your;manufacturing plant. Machine A has a life of two years, costs $80 initially;and then $125 per year in maintenance costs. Machine B costs $150 initially;has a life of three years, and requires $100 in annual maintenance costs.;Either machine must be replaced at the end of its life with an equivalent;machine. Which is the better machine for the firm? The discount rate is 12;percent and the tax rate is zero.Project;cash flows KADS Inc. has spent $400,000 on research to develop a new computer;game. The firm is planning to spend $200,000 on a machine to produce the new;game. Shipping and installation cost of the machine will be capitalized and;depreciated, they total $50,000. The machine has an expected life of three;years, a $75,000 estimated resale value, and falls under the MACRS 7-years;class life. Revenue from the new game is expected to be $600,000 per year, with;cost of $250,000 per year. The firm has a tax rate of 35 percent, an;opportunity cost of capital of 15 percent, and it expects net working capital;to increase by $100,000 at the beginning of the project. What will the cash flows;for this project be?Project;cash flows Mom?s cookies Inc. is considering the purchase of a new cookie oven.;The original cost of the old oven was $30,000, it is now five years old, and it;has a current market value of 13,333.33. The old oven is being depreciated over;a 10-years life toward a zero estimated salvage value on a straight-line basis;resulting in a current book value of $15,000 and an annual depreciation expense;of 3,000. The old oven can be used for six more years but has no market value after;its depreciable life is over. Management is contemplating the purchase of a new;oven whose cost is $25,000 and whose estimated salvage value is zero. Expected;before-tax cash savings from the new oven are $4,000 a year over its full MACRS;depreciable life. Depreciation is computed using MACRS over a 5-year life, and;the cost of capital is 10 percent. Assume a 40 percent tax rate. What will the;cash flows for this project be?

 

Paper#48111 | Written in 18-Jul-2015

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