Question.2999 - Your assignment for this week is to complete the following questions and problems from Chapters 9 and 10. Please submit your complete assignment in the course room by the due date. Chapter 9 Problems (9-1) Calculate the after-tax cost of debt under each of the following conditions: a. rd of 13%, tax rate of 0% b. rd of 13%, tax rate of 20% c. rd of 13%, tax rate of 35% (9-3) Duggins Veterinary Supplies can issue perpetual preferred stock at a price of $50 a share with an annual dividend of $4.50 a share. Ignoring flotation costs, what is the company’s cost of preferred stock, rps? (9-6) Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4%, and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5%, and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM? (9-8) David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company’s outstanding bonds is 9%, and the company’s tax rate is 40%. Ortiz’s CFO has calculated the company’s WACC as 9.96%. What is the company’s cost of equity capital? (9-9) A company’s 6% coupon rate, semiannual payment, $1,000 par value bond that matures in 30 years sells at a price of $515.16. The company’s federal-plus-state tax rate is 40%. What is the firm’s after-tax component cost of debt for purposes of calculating the WACC? (Hint: Base your answer on the nominal rate.) Chapter 10 Questions (10-2) What types of projects require the least detailed and the most detailed analysis in the capital budgeting process? (10-4) When two mutually exclusive projects are being compared, explain why the short-term project might be ranked higher under the NPV criterion if the cost of capital is high whereas the long-term project might be deemed better if the cost of capital is low. Would changes in the cost of capital ever cause a change in the IRR ranking of two such projects? Why or why not?Chapter 10 Problems (10-7) Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flows: Year Project A Project B 1 $5,000,000 $20,000,000 2 10,000,000 10,000,000 3 20,000,000 6,000,000a. What are the two projects’ net present values, assuming the cost of capital is 5%? 10%? 15%? b. What are the two projects’ IRRs at these same costs of capital? (10-9) Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies to both investments is 12%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per year and those for the gas-powered truck will be $5,000 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to recommend. (10-12) After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that could result in environmental damage. Before proceeding with the extraction, CTC must spend $900,000 for new mining equipment and pay $165,000 for its installation. The gold mined will net the firm an estimated $350,000 each year for the 5-year life of the vein. CTC’s cost of capital is 14%. For the purposes of this problem, assume that the cash inflows occur at the end of the year. a. What are the project’s NPV and IRR? b. Should this project be undertaken if environmental impacts were not a consideration? c. How should environmental effects be considered when evaluating this, or any other, project? How might these concepts affect the decision in part b?
Answer Below:
Your xxxxxxxxxx for xxxx week xx to xxxxxxxx the xxxxxxxxx questions xxx problems xxxx Chapters xxx Please xxxxxx your xxxxxxxx assignment xx the xxxxxx room xx the xxx date xxxxxxx Problems x Calculate xxx after-tax xxxx of xxxx under xxxx of xxx following xxxxxxxxxx a xx of xxx rate xx b xx of xxx rate xx c xx of xxx rate xx Solution x After-tax xxxx of xxxx before-tax xxxx x xxxxxxxxx tax x - x X x X x X x - xxxxxxx Veterinary xxxxxxxx can xxxxx perpetual xxxxxxxxx stock xx a xxxxx of x share xxxx an xxxxxx dividend xx a xxxxx Ignoring xxxxxxxxx costs xxxx is xxx company x cost xx preferred xxxxx rps xxxxxxxx Company x cost xx preferred xxxxx rps xxxxxxxx Price x Booher xxxx Stores xxx a xxxx of xxx yield xx a xxxxxx T-bill xx and xxx yield xx a xxxxx T-bond xx The xxxxxx risk xxxxxxx is xxx the xxxxxx on xx average xxxxx in xxx market xxxx year xxx What xx the xxxxxxxxx cost xx common xxxxxx using xxx CAPM xxxxxxxx According xx CAPM xx Rrf x Rpm x David xxxxx Motors xxx a xxxxxx capital xxxxxxxxx of xxxx and xxxxxx The xxxxx to xxxxxxxx on xxx company x outstanding xxxxx is xxx the xxxxxxx s xxx rate xx Ortiz x CFO xxx calculated xxx company x WACC xx What xx the xxxxxxx s xxxx of xxxxxx capital xxxxxxxx WACC xx -Tc x D x rE x V x x xx rE xx rE xxxx of xxxxxx Capital x A xxxxxxx s xxxxxx rate xxxxxxxxxx payment xxx value xxxx that xxxxxxx in xxxxx sells xx a xxxxx of xxx company x federal-plus-state xxx rate xx What xx the xxxx s xxxxxxxxx component xxxx of xxxx for xxxxxxxx of xxxxxxxxxxx the xxxx Hint xxxx your xxxxxx on xxx nominal xxxx Solution xxxxxxxxxxx Coupon xxxxxxx Annual xxxxxx Payment x Bond xxx payments xxxxx X xxxxxxxx per xxxxx N xx - xxx and xx to xxx I xxxxxxxx rate xxx nominal xxxx is xxx The xxxxxxxxx component xxxx of xxxx is xxxxxxx Questions x What xxxxx of xxxxxxxx require xxx least xxxxxxxx and xxx most xxxxxxxx analysis xx the xxxxxxx budgeting xxxxxxx Solution xxxxx can xx various xxxxx of xxxxxxxx requiring xxxxxxx scales xx capital xxxxxxxxx analysis xxx capital xxxxxxxxxxxx These xxxxxxxx are xxxxxxx into xxxxxx main xxxxxxxxxx Expansion xxxxxxx Acquisition xxxxxxx Modernization xxxxxxxxxxx Projects xxxxxxxxxxx Projects xxxxxxxxxx Project xxx of xxxxx Replacement xxxxxxxx are xxxx complicated xx compared xxxx other xxxxx of xxxxxxx budgeting xxxxxxxx because xxx organization xxxxxxx has xxxx information xxx running xxxxxxxxx and xxxx for xxxxxxxxx equipment xx knowing xxx reasons xx install xxxx equipment x e xxxx benefit xxxxxxxx - xxxx two xxxxxxxx exclusive xxxxxxxx are xxxxx compared xxxxxxx why xxx short-term xxxxxxx might xx ranked xxxxxx under xxx NPV xxxxxxxxx if xxx cost xx capital xx high xxxxxxx the xxxxxxxxx project xxxxx be xxxxxx better xx the xxxx of xxxxxxx is xxx Would xxxxxxx in xxx cost xx capital xxxx cause x change xx the xxx ranking xx two xxxx projects xxx or xxx not xxxxxxxx The xxx is xxxxxxxx by xxxxxxxxxxx future xxxx flows xxx the xxxxxxxxxxx process xxxxxxxx compounds xxx interest xxxx over xxxx Thus xx increase xx the xxxxxxxx rate xxx a xxxx greater xxxxxx on x cash xxxx in xxxx than xx a xxxx flow xx Year xx the xxx rankings xxx constant xxx independent xx the xxxx s xxxx of xxxxxxx Chapter xxxxxxxx - xxxx division xx considering xxx investment xxxxxxxx each xx which xxxxxxxx an xxxxxxxx expenditure xx million xxx estimate xxxx the xxxxxxxxxxx will xxxxxxx the xxxxxxxxx net xxxx flows xxxx Project x Project x a xxxx are xxx two xxxxxxxx net xxxxxxx values xxxxxxxx the xxxx of xxxxxxx is x What xxx the xxx projects xxxx at xxxxx same xxxxx of xxxxxxx Solution x Cost xx Capital xxxx Project x PV xx PV xxxxx Year xxxxxxx B xxxxx b xxxxxxxxxx A xxxxxxx B x Davis xxxxxxxxxx must xxxxxx between x gas-powered xxx an xxxxxxxxxxxxxxxx forklift xxxxx for xxxxxx materials xx its xxxxxxx Because xxxx forklifts xxxxxxx the xxxxxxxxxxxx the xxxx will xxxxxx only xxx They xxx mutually xxxxxxxxx investments xxx electric-powered xxxxx will xxxx more xxx it xxxx be xxxx expensive xx operate xx will xxxx whereas xxx gas-powered xxxxx will xxxx The xxxx of xxxxxxx that xxxxxxx to xxxx investments xx The xxxx for xxxx types xx truck xx estimated xx be xxxxx during xxxxx time xxx net xxxx flows xxx the xxxxxxxxxxxxxxxx truck xxxx be xxx year xxx those xxx the xxxxxxxxxxx truck xxxx be xxx year xxxxxx net xxxx flows xxxxxxx depreciation xxxxxxxx Calculate xxx NPV xxx IRR xxx each xxxx of xxxxx and xxxxxx which xx recommend xxxxxxxx Electric-powered xxx E x i x i x n x - x - x I xxx FV xxx Gas-powered xxxx - x - x i x - x - x N x PMT xx IRR xxx firm xxxxxx choose xxx electric-powered xxxxxxxx because xx has x higher xxx amp x higher xxx - xxxxx discovering x new xxxx vein xx the xxxxxxxx mountains xxx Mining xxxxxxxxxxx must xxxxxx whether xx go xxxxx and xxxxxxx the xxxxxxx The xxxx cost-effective xxxxxx of xxxxxx gold xx sulfuric xxxx extraction x process xxxx could xxxxxx in xxxxxxxxxxxxx damage xxxxxx proceeding xxxx the xxxxxxxxxx CTC xxxx spend xxx new xxxxxx equipment xxx pay xxx its xxxxxxxxxxxx The xxxx mined xxxx net xxx firm xx estimated xxxx year xxx the xxxxx life xx the xxxx CTC x cost xx capital xx For xxx purposes xx this xxxxxxx assume xxxx the xxxx inflows xxxxx at xxx end xx the xxxx a xxxx are xxx project x NPV xxx IRR x Should xxxx project xx undertaken xx environmental xxxxxxx were xxx a xxxxxxxxxxxxx c xxx should xxxxxxxxxxxxx effects xx considered xxxx evaluating xxxx or xxx other xxxxxxx How xxxxx these xxxxxxxx affect xxx decision xx part x Solution x Purchase xxxxx Installation xxxxxxx Outlay xx - xx - x YR xxx IRR x Ignoring xxx environmental xxxxxxxx the xxxxxxx should xx undertaken xxxxxxx its xxx is xxxxxxxx and xxx IRR xx greater xxxx the xxxx s xxxx of xxxxxxx c xxx analysis xx a xxxxxxx the xxxxxxxxxxxxx damage xxxxxx by xxx mining xxxxxxx Environmental xxxxxx is xx example xx an xxxxxxxxxxx The xxxx should xxxxxx the xxxx of xxx environment xxxxxx from xxx expected xxxx flows xx get x better xxxxxxxx of xxx marginal xxxxxxxx and xxxxxxxx costs x f xxx project xx the xxxxxxxxxxxxx costs xxxx large xxxxxx it xxxxx lead xxx manager xx reject xxx projectMore Articles From Accounting
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