1. Explain a possible benefit of a corporation using debt and a possible problem of having debt? Provide Examples
2. A manufacturer requires $1800 to purchase a new piece of equipment plans to use debt to acquire the needed funds. One source will loan him $800 but requires 6% interest. A 2nd source will provide him with $200 but requires 8% interest his 3rd and final source will loan him the thousand dollars that he needs but at 12% interest. a) What is his WACC at the end of one year? b) Find the NPV if the new equipment is expected to increase profits by $2000. c) Should he borrow the money to buy the equipment?
3. If 3M Corporation has a beta of .75 and DuPont has a beta of 1.5 what are the expected returns of these 2 companies if the current market risk premium is 10% and the current risk free rate is 3%?
4. Joe wants to purchase common shares of Portland Cement Company stock and hold these common shares for 7 years. The company has stated the following dividend policy: $7 annual cash dividend per share for the next 7 years. At the end of 7 years Joe plans to sell the stock. He believes that he will be able to sell the stock for $85. If Joe wants to earn 10% on this investment what price should he pay today for the stock?