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
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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.

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Week4 - 10-3 Vps = $50; Dps = $4.50; F = 0%; rps = ? rps =...

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