Assignment:
1. After - tax cost of debt The Heuser Company's currently outstanding bonds have a 10 percent coupon and a 12 percent yield to maturity. Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35 percent, what is Heuser's after - tax cost of debt?
2. Cost of common equity Percy Motors has a target capital structure of 40 percent debt and 60 percent common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 9 percent, and its tax rate is 40 percent. Percy's CEO estimates that the company's WACC is 9.96 percent. What is Percy's cost of common equity?
3. Projection selection Midwest Water Works estimates that its WACC is 10.5 percent. The company is considering the following capital budget projects:
Project Size Rate of Return
A $1 million 12.0%
B 2 million 11.5
C 2 million 11.2
D 2 million 11.0
E 1 million 10.7
F 1 million 10.3
G 1 million 10.2
Assuming that each of these projects is just as risky as the firm's existing assets, and the firm may accept all the projects or only some of them. Which set of projects should be accepted? EXPLAIN.10-9 WACC The Patrick Company's cost of common equity is 16 percent, its before-tax cost of debt 13 percent, and its marginal tax rate is 40 percent. The stock sells at book value. Using the following balance sheet, calculate Patrick's WACC.
ASSETS Liabilities and Equity
Cash $120
Accounts receivable 240
Inventories 360 Long Term Debt $1,152
Plant and Equipment, net 2,160 Common equity 1,728
Total assets $2,880 Total Liabilities and equity $2,880
4. NPV Project K cost $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its WACC is 12 percent. What is the project's NPV?
5. Capital budgeting criteria A firm with 14 percent WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:
0 1 2 3 4 5
Project A -$6,000 $2,000 $2,000 $2,000 $2,000 $2,000
Project B -$18,000 $5,600 $5,600 $5,600 $5,600 $5,600
A) Calculate NPV, IRR, MIRR, payback, and discounted payback for each project.
B) Assuming the projects are independent, which one or ones would you recommend?
C) If the projects are mutually exclusive, which would you recommend?