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Description
INSTRUCTIONS
** You must show your work step by
step. (No credit is given, if you just put the final results)
***You can use Excel for calculations;
if you wish, but all solutions must be typed as Microsoft Word text. Please
note that the scanned versions or pictures are NOT accepted. Also, make sure to
attach the correct file when you submit your homework. If you miss the deadline of the homework, please do NOT email me your
Homework, it will not be accepted.
1. Sevda 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 a 7.00 percent annual coupon, a par value of
$1,000, and a market price of $1,050.00.
(2) The company’s tax rate is 35%.
(3) The risk-free rate is 4.50%, the
market risk premium is 5.50%, and the stock’s beta is 1.45. (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 equity, and it does not
expect to issue any new common stock.
What is its WACC?
2. H. Ibsen Corporation hired you as a
consultant to help them estimate its cost of capital. You have been provided with the following
data: D0 = $1.36; P0 = $20.50; and g = 6.50%
(constant). Based on the DCF approach,
what is the cost of equity from retained earnings?
3. W. Rooney Company. is considering a new
project whose data are shown below. The
equipment that would be used has a 3-year tax life, would be depreciated by the
straight-line method over its 3-year life, and would have a zero salvage
value. There is no need for a change in
new working capital. Revenues and other
operating costs are expected to be constant over the project’s 3-year life. What is the project’s NPV and IRR?
Risk-adjusted
WACC 10%
Additional
Net Working Capital needed
$3,000
Net
investment cost (depreciable basis) $65,000
Sales
revenues, each year $65,500
Operating
costs (excl. deprec.), each year $25,000
Tax
rate 35%
4. In
1985, a particular Japanese imported automobile sold for 1,476,000 yen or
$8,200. If the car still sells for the
same amount of yen today but the current exchange rate is 150 yen per dollar,
what is the car selling for today in U.S. dollars?
