Problem 1:
A firm has a capital structure which consists of 30% debt and 70% equity. The cost of debt is 10% and the cost of equity is 15%. Find the cost of capital if the firm's tax rate is 34%.
Problem 2:
A firm is evaluating a project with the following cash flows:
Year0 = (100,000)
Year1 = 26,000
Year2 = 28,000
Year3 = 28,000
Year4 = 28,000
Year5 = 28,000
Year6 = 28,000
Year7 = 28,000
Year8 = 28,000
Year9 = 28,000
Year10 = 30,000
The cost of capital is 12%.
(a) Find NPV and IRR
(b) Evaluate the project using each of your answers to (a)
Problem 3:
A firm has a cost of capital of 5% and is considering two mutually exclusive investment projects with the following cash flows:
Project A
Year 0 = (70,500)
Year 1 = 40,000
Year 2 = 30,000
Year 3 = 20,000
Year 4 = 10,000
Project B
Year 0 = (70,500)
Year 1 = 10,000
Year 2 = 20,000
Year 3 = 30,000
Year 4 = 50,000
(a) Find the IRR and NPV for each project
(b) Which project should the firm select? Why?