1. AMJ, Inc., currently borrows 29.00% of its funds.
The interest rate on its debt is 7.80%. AMJ's required rate of return on equity is 17.10%, and its marginal tax rate is 37.00%. Determine AMJ's weighted average cost of capital.
2. VFS, Inc., which has a beta on its stock of 0.9, borrows 31.00% of its funds; its interest rate on its debt is 7.90%. VFS's marginal tax rate is 37.00%. Determine VFS's weighted average cost of capital. Assume the expected return on the market is 12.80% and the riskfree return is 7.30%.
3. URD, Inc., is considering a typical project that has an internal rate of return of 9.30%. URD's marginal tax rate is 37.00% and the beta on its stock is 1.1. URD raises 77.00% of its funds from equity, borrowing the rest at an interest rate of 7.20%. The riskfree return is 6.80% and expected return on the market is 13.80%.
a. What is the required rate of return for this project?
b. Should URD invest in this project (Yes or No)
4. YBZ, Inc., is considering a typical project that costs $43,000 now and will result in net cash inflows $5,800 one year from now, $6,800 two years from now, and $7,800 three years from now. There are no other cash flows. The riskfree return on YBZ is 6.90%, whereas YBZ pays 7.20% on its debt. YBZ borrows 27.00% of its funds. The marginal tax rate for YBZ is 37.00% and the beta on YBZ's stock is 1.3. Assume the expected return on the market is 13.80%.
a. What is the required rate of return on this project?
b. What is the NPV of this project?
c. Should YBZ invest in this project? (Yes or No)