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Fin500 case 3 assignment




Question;This;case assignment is focused on Bond valuation and stock valuation concepts and;procedures.;1.;You were hired as a consultant to Quigley Company, whose target;capital structure is 35% debt, 10% preferred, and 55% common equity. The interest;rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of;common from retained earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new common;stock. What is Quigley's WACC?;2.;You were recently hired by Scheuer Media Inc. to estimate its;cost of common equity. You obtained the;following data: D1 = $1.75, P0;= $42.50, g = 7.00% (constant), and F = 5.00%.;What is the cost of equity raised by selling new common stock?;3.;S. Bouchard and Company hired you as a consultant to help;estimate its cost of common equity. You;have obtained the following data: D0;= $0.85, P0 = $22.00, and g = 6.00% (constant). The CEO thinks, however, that the stock price;is temporarily depressed, and that it will soon rise to $40.00. Based on the DCF approach, by how much would;the cost of common from retained earnings change if the stock price changes as;the CEO expects?;4.;Bolster Foods? (BF) balance sheet shows a total of $25 million;long-term debt with a coupon rate of 8.50%.;The yield to maturity on this debt is 8.00%, and the debt has a total;current market value of $27 million. The;balance sheet also shows that the company has 10 million shares of stock, and;the stock has a book value per share of $5.00.;The current stock price is $20.00 per share, and stockholders' required;rate of return, rs, is 12.25%.;The company recently decided that its target capital structure should;have 35% debt, with the balance being common equity. The tax rate is 40%. Calculate WACCs based on book, market, and;target capital structures.;5.;Daves Inc. recently hired you as a consultant to estimate the company?s WACC. You have obtained the following;information. (1) The firm's noncallable;bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000;and a market price of $1,050.00. (2) The;company?s tax rate is 40%. (3) The;risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock?s beta;is 1.20. (4) The target capital;structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost;of common stock, and it does not expect to issue any new shares. What is its WACC?;6.;Current Design Co. is considering two mutually exclusive, equally;risky, and not repeatable projects, S and L. Their cash flows are shown below.;The CEO believes the IRR is the best selection criterion, while the CFO;advocates the NPV. If the decision is made by choosing the project with the;higher IRR rather than the one with the higher NPV, how much, if any, value;will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV?;Note that (1) "true value" is measured by NPV, and (2) under some;conditions the choice of IRR vs. NPV will have no effect on the value gained or;lost.;WACC;7.50%;Year;0;1;2;3;4;CFS;-$1,100;$550;$600;$100;$100;CFL;-$2,700;$650;$725;$800;$1,400;7.;Projects S and L, whose cash flows are shown below, are mutually;exclusive, equally risky, and not repeatable. Hooper Inc. is considering which;of these two projects to undertake. If the decision is made by choosing the;project with the higher IRR, how much value will be forgone? Note that under;certain conditions choosing projects on the basis of the IRR will not cause any;value to be lost because the project with the higher IRR will also have the;higher NPV, so no value will be lost if the IRR method is used.;WACC;10.25%;Year;0;1;2;3;4;CFS;-$2,050;$750;$760;$770;$780;CFL;-$4,300;$1,500;$1,518;$1,536;$1,554;8.;Shannon Co. is considering a project that has the following cash;flow and WACC data. What is the project's discounted payback?;WACC;10.00%;Year;0;1;2;3;4;Cash;flows;-$950;$525;$485;$445;$405;9.;Westwood Painting Co. is considering a project that has the;following cash flow and WACC data. What is the project's MIRR? Note that a;project's MIRR can be less than the WACC (and even negative), in which case it;will be rejected.;WACC;12.25%;Year;0;1;2;3;4;Cash;flows;-$850;$300;$320;$340;$360;10. Last;month, Standard Systems analyzed the project whose cash flows are shown below.;However, before the decision to accept or reject the project took place, the;Federal Reserve changed interest rates and therefore the firm's WACC. The Fed's;action did not affect the forecasted cash flows. By how much did the change in;the WACC affect the project's forecasted NPV? Note that a project's expected;NPV can be negative, in which case it should be rejected.;Old;WACC;10.00%;New;WACC;11.25%;Year;0;1;2;3;Cash flows;-$1,000;$410;$410;$410


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