ch13 problem 39 - 2011 Dr. William F. Rentz &...

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1 Capital Budgeting: Problem 39 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. 2
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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% 3
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Capital Budgeting: Problem 39 b. Calculate the project’s IRR.
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Unformatted text preview: 2011 Dr. William F. Rentz & Associates, All Rights Reserved 4 Capital Budgeting: Problem 39 b. Calculate the projects IRR. 0 = $37,500 x PVIFA r,5- $120,000 Financial Calculator: P/Y = C/Y = 1, N = 5, PV = - $120,000, PMT = $37,500, FV = 0, CPT I/Y = 16.99% 2011 Dr. William F. Rentz & Associates, All Rights Reserved 5 Capital Budgeting: Problem 39 c. Using the IRR decision rule, should the firm accept the project? 2011 Dr. William F. Rentz & Associates, All Rights Reserved 6 Capital Budgeting: Problem 39 c. Using the IRR decision rule, should the firm accept the project? Yes, IRR = 13.99% > 10.16% = K A 2011 Dr. William F. Rentz & Associates, All Rights Reserved 7...
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This note was uploaded on 03/12/2012 for the course TELFER ADM2350 taught by Professor Rentz during the Winter '12 term at University of Ottawa.

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ch13 problem 39 - 2011 Dr. William F. Rentz &...

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