# exam 3d - Name Peoplesoft Number University of Houston...

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Name _________________________________ Peoplesoft Number _________________________________ University of Houston Bauer College of Business Finance 3332 Principles of Financial Management Exam 3D: Fall, 2009 Show equations either in variable form or equations with numbers plugged in, unless instructed differently Calculator financial function inputs must be shown. Clearly indicate your (one) answer Carry all decimals, rounding only final answer Decimal places on answers should be rounded to 4 places (2 in percent form) Currency answers rounded to the nearest cent, where applicable Include applicable units on answers Point values are in parentheses. 1. Castle Corporation is planning a capital project with equipment costing a total of \$450,000, which includes shipping  of \$15,000 and installation of \$20,000. This equipment has an expected life of 15 years and a salvage value of \$4000.  Revenues are expected to increase by \$50,000 per year and operating expenses by \$10,000 per year. An additional  working capital investment of \$5000 is also required, and the firm’s marginal tax rate is 40 percent. What are the  Net Cash Flows  per year of this project, including any one-time, end of project cash flows?  (6) 2. Management is planning for a capital budget of \$40 million. Retained earnings for the coming year are expected to be  \$24 million, and the firm’s marginal tax rate is 40 percent. Calculate the firm’s WACC given the following component  costs of capital. (8) Component Costs of Capital Before tax cost of debt 5% Cost of retained earnings 11% Cost of new equity 12% Target Capital Structure Debt 20% Common stock 80%

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3. Management is planning for a capital budget of \$500 million. Retained earnings for the coming year are expected to be  \$200 million, and the firm’s marginal tax rate is 40 percent. The firm can net \$902.87 on each new bond, \$1000 par, 5 percent coupon paid annually, 15 years to maturity. (Only  calculator inputs are required.) The firm’s \$6 preferred stock is selling for \$70 per share. New \$6 preferred can be issued to net the firm \$66.66 per share. The firm’s common stock is expected to pay a dividend of \$2 per share next year, its market price is \$40 per share, and  analysts expect a growth rate of about 7 percent per year. New common stock can be issued to net the firm \$28.57 share.   Calculate and clearly identify the cost of  each  source of capital. (10) 4. What is the value of a 7 percent, 25 year \$1000 bond that pays interest  semi-annually  if the bond’s yield to  maturity is 6 percent? (Only calculator inputs are required.) (6) 5. a) Determine to the nearest dollar, the market value of the Leveraged firm using the
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## This note was uploaded on 11/30/2010 for the course FINA 10606 taught by Professor Darlachisholm during the Fall '08 term at University of Houston.

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exam 3d - Name Peoplesoft Number University of Houston...

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