Problem 1: Find the WACC for HHH Inc. using the following: The company has 10,000 coupon bonds oustanding selling at 104% of par, with a 7% coupon rate, semi-annual payments, $1,000 par value, and 20 years to maturity. Common stock has 200,000 shares outstanding, selling at $65 per share and a beta of 0.90. The company's tax rate is 40%. The risk-free rate of interest is 3.75% and there is a market risk premium of 5.5%.
| |
Long Term Debt |
Common Stock |
|
Other Company Information |
|
Market Information |
| Number |
10,000 |
200,000 |
|
Net Income |
$1,000,000 |
|
MRP |
5.50% |
| Price |
104.00% |
$65.00 |
|
b |
0.9 |
|
rRF |
3.75% |
| Par |
$1,000.00 |
$1.00 |
|
g |
3.50% |
|
|
|
| Coupon |
7.00% |
|
|
T |
40.00% |
|
|
|
| n |
20 |
infinite |
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|
| m |
2 |
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Problem 2: You must determine which of two mutually exclusive opportunities to choose for your company's next investment project. The cash flows for these two projects, X and Y, are illustrated below. Assuming that the appropriate discount rate is the r given below, determine the NPV, IRR, and MIRR for each of these projects and indicate which project you recommend for adoption by your company with a "yes" in the corresponding box.
| INPUT DATA |
|
|
|
r |
10.00% |
| Year |
0 |
1 |
2 |
3 |
4 |
| CFX |
($10,200) |
$7,600 |
$4,000 |
$3,000 |
$2,000 |
| CFY |
($10,200) |
$3,900 |
$3,000 |
$4,000 |
$5,000 |
|
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|
|
|
|
| |
NPV |
IRR |
MIRR |
ADOPTION |
| X |
|
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|
|
| Y |
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Problem 3: A company has outstanding long-term bonds with a face value of $1,000, a 10% coupon rate, 25 years remaining until maturity, and a current market value of $1,214.82. If it pays interest semiannually, what is the nominal annual pre-tax cost of debt? If the company's tax rate is 40%, what is the after-tax cost of debt?
Problem 4: A company's preferred stock currently trades at $50 per share and it pays a $3 annual dividend. Flotation costs are equal to 3% of the gross proceeds. If the company issues preferred stock, what is the cost of that stock?
Problem 5: A company's beta is 1.4, the yield on a 10-year T-bond is 5%, and the market risk premium is 5.5%. What is rs?
Problem 6: A company's estimated growth rate in dividends is 6%. Its current stock price is $40, and its expected annual dividend is $2. Using the DCF approach, what is rs?
Problem 7: A firm has the following data: Target capital structure of 25% debt, 10% preferred stock, and 65% common equity; Tax rate = 40%; rd = 7%; rps = 7.5%; and rs = 11.5%. Assume the firm will not isssue new stock. What is this firm's WACC?
Problem 8: A firm has common stock with D1 = $3.00; P0 = $30; g = 5%; and F = 4%. If the firm must issue new stock, what is its cost of external equity, re?
Problem 9: A company's bond yield is 7%. If the appropriate over-own-bond-yield risk premium is 3.5%, what is rs, based upon the bond--yield-plus-judgmental-risk-premium approach?
Problem 10: Projects SS and LL have the following cash flows:
| WACC = r = |
10% |
|
|
|
|
0 |
1 |
2 |
3 |
| SS |
-700 |
500 |
300 |
100 |
| LL |
-700 |
100 |
300 |
600 |
If a 10% cost of capital is appropriate for both of them, what are their NPVs?
What project or set of projects would be in your capital budget if SS and LL were (a) independent or (b) mutually exclusive?
Problem 11:
The cash flows for Projects SS and LL are as follows:
| WACC = r = |
10% |
|
|
|
|
0 |
1 |
2 |
3 |
| SS |
-700 |
500 |
300 |
100 |
| LL |
-700 |
100 |
300 |
600 |
What are the two projects' IRRs, and which one would the IRR method
select if the firm has a 10% cost of capital and the projects are (a) independent or (b) mutually exclusive?
If the two projects are independent, accept both. If the two projects are mutually exclusive, accept Project LL.
Calculate MM's NPV at discount rates of 0%, 10%, 12.2258%, 25%, 122.1470%, and 150%. What are MM's IRRs? If the cost of capital were 10%, should the project be accepted or rejected?
Problem 12:
Projects A and B have the following cash flows:
|
0 |
1 |
2 |
| A |
-$1,000 |
$1,150 |
$100 |
| B |
-$1,000 |
$100 |
$1,300 |
Their cost of capital is 10%. What are the projects' IRRs, MIRRs, and NPVs?
Which project would each method select?
Problem 13:
A project has the following expected cash flows: CF0 = -$500, CF1 = $200, CF2 = $200, and CF3 = $400. If the project's cost of capital is 9%, what is the PI?
Problem 14:
Project P has a cost of $1,000 and cash flows of $300 per year for 3 years plus another $1,000 in Year 4. The project's cost of capital is 15%. What are P's regular and discounted paybacks?
Regular payback
| Years |
0 |
1 |
2 |
3 |
4 |
|
|
| |
| |
| |
| |
| Cash Flow |
-1,000 |
300 |
300 |
300 |
1,000 |
| Cumulative Cash Flow |
-1,000 |
-700 |
-400 |
-100 |
900 |
Discounted payback
| Years |
0 |
1 |
2 |
3 |
4 |
|
|
| |
| |
| |
| |
| Cash Flow |
-1,000 |
300 |
300 |
300 |
1,000 |
| Discounted Cash Flow |
-1,000 |
261 |
227 |
197 |
572 |
| Cumulative Discounted CF |
-1,000 |
-739 |
-512 |
-315 |
257 |
If the company requires a payback of 3 years or less, would the project be accepted?
Would this be a good accept/reject decision, considering the NPV and/or the IRR?