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# Week4 - 10-3 Vps = \$50 Dps = \$4.50 F = 0 rps = rps =...

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10-3 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% 10-7 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)(1-0.40) + 0.05(0.058) + 0.65(0.12) = 9.17%. 10-15 a. Common equity needed: 0.5(\$30,000,000) = \$15,000,000. b. Cost using r s : After-Tax 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. 10-16 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 long-term 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: Short-term debt \$10,000,000 11.14% Long-term debt 19,783,800 22.03 Common equity 60,000,000 66.83 \$89,783,800 100.00% 11-10 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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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. 11-12 a. Purchase price \$ 900,000 Installation 165,000 Initial outlay \$1,065,000 CF 0 = -1065000; CF 1-5 = 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 might be imposed on the firm to help return the land to its previous state (if possible). These outflows could be so large as to cause the project to have a negative NPV--in which case the project should not be undertaken. MINICASE CHAPTER-10 a. 1. What sources of capital should be included when you estimate Harry Davis’ weighted average cost of capital (WACC)? Answer: The WACC is used primarily for making long-term capital investment decisions, i.e., for capital budgeting. Thus, the WACC should include the types of capital used to pay for long-term assets, and this is typically long-term debt, preferred stock (if used), and common stock. Short-term sources of capital consist of (1) spontaneous, noninterest-bearing liabilities such as accounts payable and accruals and (2) short-term interest-bearing debt, such as notes
payable. If the firm uses short-term interest-bearing debt to acquire fixed assets rather than

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