Practice_FinalExam_Solutions

# Practice_FinalExam_Solutions - Problem 2 Input Area Land...

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Problem 2 Input Area: Land price \$3,000,000 Land appraisal \$9,600,000 Plant cost \$15,000,000 Debt Bonds outstanding 15,000 Settlement date 01/01/05 Maturity date 01/01/20 Annual coupon rate 7.00% Coupons per year 2 Face value (% of par) 100 Bond price (% of par) 92 Common stock Shares outstanding 300,000 Beta 1.30 Share price \$75.00 Preferred stock outstanding Shares outstanding 20,000 Coupon rate 5.00% Share price \$72.00 Market Market risk premium 8.00% Risk-free rate 5.00% Equity floatation cost 9.00% Preferred floatation cost 7.00% Debt floatation cost 4.00% Tax rate 35% Net working capital \$900,000 Does the NWC require floatation costs (Yes/No) No b. Adjustment factor 2% c. Life of plant (years) 5 Life of project (years) 5

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Plant salvage value \$5,000,000 d. Annual fixed costs \$400,000 Variable costs per RDS \$9,000 # RDS manufactured 12,000 Sale price per RDS \$10,000 Output Area: Market value of debt \$13,800,000 Market value of equity \$22,500,000 Market value of preferred \$1,440,000 Market value of firm \$37,740,000 D/V 0.3657 E/V 0.5962 P/V 0.0382 a. Floatation costs 0.0710 The cost of the land 3 years ago is a sunk cost and is irrelevant. Land \$(9,600,000) Plant (including floatation) \$(16,145,593) Net working capital \$(900,000) \$(26,645,593) b. Pretax cost of debt 7.92% Aftertax cost of debt

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