Assignment 1 LASA 2 Capital Budgeting Techniques - 68812

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Assignment 1 LASA # 2—Capital Budgeting Techniques

 

 

1. Wheel Industries is considering a three year expansion project. 

The project requires an initial investment of $1.5 million. The project will use straight line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million and has costs of $600,000.

The tax rate is 35%. Calculate the cash flows for the project. If the discount rate is 6% calculate the NPV of the project.

 

2. Clinton Co. has just paid a dividend of $2.50 per share. The dividends are expected to grow at a constant rate of 6% per year for ever. If the stock is currently selling for $50 per share, calculate the cost of equity for the firm.

 

 

3. The Jersey Co‘s common stock has beta of 1.25. The risk free rate is 4% and the expected return on the market is 12%. What is the firm’s cost of equity?

 

 

4. The WW Inc. has 9% coupon bonds outstanding. They have a maturity of 13 Years and are selling for $1,080. The face value is $1,000 and the interest is paid semi-annually. Calculate the cost of debt on a pre-tax basis. What will be the after tax cost of debt if the tax rate is 35%?

 

 

5. BW Co. has a target debt –equity ratio of 0.6. Its cost of debt is 12% and its cost of equity is 20%. If the corporate tax rate is 34%, what is the firm’s WACC?

 

6. MW Co. has a target capital structure of 35% common equity, 10% preferred equity and 55% debt. The cost of common equity is 18%, the cost of preferred equity is 8% and the pre-tax cost of debt is 10%.

If the corporate tax rate is 35%, what is MW’s WACC?

If the firm has a project with an IRR of 12% would you accept the project?

 

 

 

 

 

 

 

 

 

Solution Description

  Assignment 1 LASA # 2—Capital Budgeting Techniques   1. Wheel Industries is considering a three year expansion project.  The project requires an initial investment of $1.5 million. The project will use straight line depreciation method. The project has no salvage value. It is estimated that the project will generate additiona

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