Question 1: (Calculating the WACC) The required return on debt is 8%, the required return on equity is 14%, and the marginal tax rate is 40%. If the firm is financed 70% equity and 30% debt, what is the weighted average cost of capital?
Question 2: (Estimating the WACC with three sources of capital) Eschevarria Research has the capital structure given here. If Eschevarria's tax rate is 30%, what is its WACC?
Book Value Market Value Before-Tax Cost
Bonds $1,000 $1,000 8%
Preferred stock 400 300 9%
Common stock 600 1,700 14%
Question 3: (Investment criteria) An investment of $100 returns exactly $100 in one year. The cost of capital is 10%.
1. What are the payback, NPV, and IRR for this investment?
2. Is this a profitable investment?
Question 4: (Net income and net cash flows) Julie Stansfield has a bicycle rental shop with annual revenues of $200,000. Cash operating expenses for rent, labor, and utilities are $70,000. Depreciation is $40,000. Julie's tax rate is 40%.
1. What should be Julie's net income?
2. What is her net cash flow?