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ch13 problem 39

# ch13 problem 39 - © 2011 Dr William F Rentz& Associates...

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© 2011 Dr. William F. Rentz & Associates, All Rights Reserved 1 Capital Budgeting: Problem 39 Capital structure: 60% debt & 40% equity Before-tax cost of debt = 12% Common equity beta = 1.20 Risk-free rate = 5% Market risk premium = 8% Tax rate = 40% • CF 0 = \$120,000, CF 1 = … =CF 5 = \$37,500

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Capital Budgeting: Problem 39 a. Determine the firm’s cost of capital. © 2011 Dr. William F. Rentz & Associates, All Rights Reserved 2
Capital Budgeting: Problem 39 a. Determine the firm’s cost of capital. K i = (12%)(1 – 0.4) = 7.2% K C = 5% + (1.2)(8%) = 14.6% K A = (0.6)(7.2%) + (0.4)(14.6%) K A = 4.32% + 5.84% = 10.16% © 2011 Dr. William F. Rentz & Associates, All Rights Reserved 3

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Capital Budgeting: Problem 39 b. Calculate the project’s IRR.

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