Homework 11 Solution

# Homework 11 Solution - Homework 11 Solution 1. Fido, Inc....

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Homework 11 Solution 1. Fido, Inc. has the following capital structure: \$600 million from stock sales with an average cost of 10.2% per year. \$150 million from bond sales with an average cost of 6.7% per year. \$120 million borrowed on their bank line of credit at a 5.5% APR. a. What is Fido’s before-tax WACC? The total amount of capital being used is \$600 + \$150 + \$120 = \$870 million, so the weighted average of their capital costs is  600 150 120 WACC 10.2% 6.7% 5.5% 8.9% 870 870 870  b. What is Fido’s after-tax WACC if their effective tax rate is 36%? The costs associated with raising debt capital (bonds and loans, which have to be repaid) can be written off on Fido’s taxes, so the after-tax weighted average of their capital costs is 600 150 120 WACC 10.2% 1– 0.36 6.7% 1– 0.36 5.5% 8.3% 870 870 870  c. If Fido, Inc. wants a 6% profit what is their MARR? MARR = 8.3% + 6% = 14.3% 2. Ajax, Inc. has a budget of \$1,000,000 for projects this year. Below is a list of capital investment alternatives available to them. What is the firm’s opportunity cost of capital (i.e., their MARR)? Project Investment Rate of Return A \$200,000 18.1% B \$200,000 19.7% C \$350,000 14.4% D \$175,000

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## This note was uploaded on 12/07/2011 for the course CIVL 4111 taught by Professor Moore,l during the Fall '08 term at U. Memphis.

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Homework 11 Solution - Homework 11 Solution 1. Fido, Inc....

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