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fin500 case 3




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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