FINA 363 PostExam 2 Practice Questions
Answers
Capital Budgeting
1. Riesling Inc. is considering a project that has the following cash °ows (Yr 0 is the initial investment.
That is, the amount of initial investment is
$10
;
000
).
If Riesling±s weighted average cost of capital
(WACC) is
5%
, what is the Net Present Value (NPV) of this project?
Yr 0
Yr 1
Yr 2
°
10
;
000
+2
;
000
+11
;
000
(a)
$1
;
716
:
45
(b)
$1
;
791
:
38
(c)
$1
;
882
:
09
X
2000
1
:
05
+
11000
(1
:
05)
2
°
10000
(d)
$2
;
129
:
07
(e)
$2
;
721
:
09
2. Assume that Sangiovese Corporation has a cost of equity of
12%
and a pretax
cost debt of
4%
. The
current tax rate for your ²rm is
25%
.
Your ²rm has never issued, and does not plan to issue any
preferred stocks. The DebtEquity ratio of Sangiovese is
0
:
5
. (i.e.,
W
d
W
e
= 0
:
5
:
) What is the Weighted
Average Cost of Capital (WACC) of Sangiovese?
w
d
=
0
:
5
w
e
; w
d
+
w
e
= 1
)
w
e
=
2
3
; w
d
=
1
3
(
There was a typo. This one is OK.
WACC
=
1
3
±
4
±
(1
°
0
:
25) +
2
3
±
12
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 Spring '10
 Masoudie
 Net Present Value, Internal rate of return, Weighted average cost of capital, Average cost, pretax cost debt

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