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103 V
ps
= $50; D
ps
= $4.50; F = 0%; r
ps
= ?
r
ps
=
D
ps
/ (
V
ps
) (1 
F
)
= ($4.5) / $50 (1  0)
= 9%
107 30% Debt; 5% Preferred Stock; 65% Equity; r
d
= 6%; T = 40%; r
ps
= 5.8%; r
s
= 12%.
WACC = (w
d
)(r
d
)(1  T) + (w
ps
)(r
ps
) + (w
ce
)(r
s
)
WACC = 0.30(0.06)(10.40) + 0.05(0.058) + 0.65(0.12) = 9.17%.
1015 a. Common equity needed:
0.5($30,000,000) = $15,000,000.
b. Cost using r
s
:
AfterTax
Percent
× Cost
= Product
Debt 0.50 4.8%* 2.4%
Common equity 0.50 12.0 6.0
WACC = 8.4%
*8%(1  T) = 8%(0.6) = 4.8%.
c. r
s
and the WACC will increase due to the flotation costs of new equity.
1016 The book and market value of the current liabilities are both $10,000,000.
The bonds have a value of
V = $60(PVIFA
10%,20
) + $1,000(PVIF
10%,20
)
= $60([1/0.10][1/(0.1*(1+0.10)
20
)]) + $1,000((1+0.10)
20
)
= $60(8.5136) + $1,000(0.1486)
= $510.82 + $148.60 = $659.42.
Alternatively, using a financial calculator, input N = 20, I = 10, PMT = 60, and FV = 1000 to
arrive at a PV = $659.46.
The total market value of the longterm debt is 30,000($659.46) = $19,783,800.
There are 1 million shares of stock outstanding, and the stock sells for $60 per share.
Therefore, the market value of the equity is $60,000,000.
The market value capital structure is thus:
Shortterm debt
$10,000,000
11.14%
Longterm debt
19,783,800
22.03
Common equity
60,000,000
66.83
$89,783,800
100.00%
1110 Financial calculator solution, NPV:
Project S
Inputs N=5 I=12 PMT=3000 FV=0
Output = PV = 10,814.33
NPV
S
= $10,814.33  $10,000 = $814.33.
Project L
Inputs N=5 I=12 PMT=7400 FV=0
Output = PV = 26,675.34
NPV
L
= $26,675.34  $25,000 = $1,675.34.
Financial calculator solution, IRR:
Input CF
0
= 10000, CF
1
= 3000, N
j
= 5, IRR
S
= ? IRR
S
= 15.24%.
Input CF
0
= 25000, CF
1
= 7400, N
j
= 5, IRR
L
= ? IRR
L
= 14.67%.
Financial calculator solution, MIRR:
Project S
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View Full Document Inputs N=5 I=12 PV=0 PMT=3000
Output = FV = 19,058.54
PV costs
S
= $10,000.
FV inflows
S
= $19,058.54.
Inputs N=5 PV=10000 PMT=0 FV=19058.54
Output = I = 13.77
MIRR
S
= 13.77%.
Project L
Inputs N=5 I=12 PV=0 PMT=7400
Output = FV = 47,011.07
PV costs
L
= $25,000.
FV inflows
L
= $47,011.07.
Inputs N=5 PV=25000 PMT=0 FV=47011.07
Output = I = 13.46
MIRR
L
= 13.46%.
PI
S
= $10,814.33/$10,000=1.081. PI
L
= $26,675.34/$25,000 = 1.067.
Thus, NPV
L
> NPV
S
, IRR
S
> IRR
L
, MIRR
S
> MIRR
L
, and PI
S
> PI
L
. The scale difference between
Projects S and L result in the IRR, MIRR, and PI favoring S over L. However, NPV favors
Project L, and hence L should be chosen.
1112 a. Purchase price $ 900,000
Installation 165,000
Initial outlay $1,065,000
CF
0
= 1065000; CF
15
= 350000; I = 14; NPV = ?
NPV = $136,578; IRR = 19.22%.
b. Ignoring environmental concerns, the project should be undertaken because its NPV is positive
and its IRR is greater than the firm's cost of capital.
c. Environmental effects could be added by estimating penalties or any other cash outflows that
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This note was uploaded on 01/27/2009 for the course FI FI515 taught by Professor Fi515 during the Spring '09 term at Dominican.
 Spring '09
 FI515

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