1. Potsdam Co has 3 million shares of common stock, each selling for $30, with β = 1.7. The company has $40 million in long-term bonds, selling at par, with coupon 7%. The tax rate of Potsdam is 30% and the risk-free rate is 5%. The expected return on the market is 12%. Find the WACC for Potsdam.
2. Ohio Corporation has 6 million shares of common stock priced at $25 per share, which has just paid its annual dividend of $1.75. The dividends have grown steadily at the rate of 5% per year and the investors expect the growth to continue in the future. The 6% coupon bonds of the corporation have a face value of $60 million. The bonds will mature in 10 years and currently they sell at $857.14 each. The tax rate of Ohio is 25%. Calculate its WACC.
3. Erlangen Corporation needs a new machine that will cost $50,000. It will run for 5 years and the firm will depreciate it on a straight line basis, with no resale value. The machine will add $14,000 annually to Erlangen's earnings before taxes. The proper discount rate is 12% and the tax rate is 32%. Should Erlangen install the machine?
4. Freiburg Company wants to buy a machine that has expected life of 6 years. It costs $30,000, and increases the income of the company by $7,000 annually. It has a salvage value of $5,000. The proper discount rate is 12%, and the company pays no taxes at present. Should Freiburg purchase this machine?