10years current yield to maturity 5 9 10 accounts

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 10 years, current yield to maturity  5  9%) $10 Accounts receivable 3 Preferred stock (par value $20 per share) 2 Inventories 7 Common stock 10 Plant and equipment 21 Retained earnings 10 Total $32 Total $32 *17. Calculating WACC. Turn back to University Products’s balance sheet from problem 16. If the preferred stock pays a dividend of $2 per share, the beta of the common stock is 1.5, the market risk premium is 7 percent, the risk-free rate is 4 percent, and the firm’s tax rate is 40 percent, what is University’s weighted-average cost of capital? (LO4) 18. Integrative. University Products is evaluating a new venture into home computer systems (see problems 16 and 17). The internal rate of return on the new venture is estimated at 13.4 percent. WACCs of firms in the personal computer industry tend to average around 14 percent. Should the new project be pursued? What assumptions must valid to make discounting the cash flows from the proposed venture at University Products’s WACC the cor- rect decision? On the other hand, what assumptions must be valid to making discounting the cash flows from the proposed venture at the average WACC of firms in the personal computer industry the correct decision? (LO1, LO5) 19. Comprehensive. The total market value of Muskoka Real Estate Company is $6 million and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock is currently 1.5 and that the expected risk premium on the market is 7 percent. The Treasury bill rate is 4 percent. a. What is the required rate of return on Muskoka stock? (LO3) b. What is the beta of the company’s existing portfolio of assets? The debt is perceived to be virtually risk- free. (LO3) c. Estimate the weighted-average cost of capital assuming a tax rate of 40 percent. (LO4) d. Estimate the discount rate for an expansion of the company’s present business. (LO5) e. Suppose the company wants to diversify into the manufacture of rose-coloured glasses. The beta of optical manufacturers with no debt outstand- ing is 1.2. What is the required rate of return on Muskoka’s new venture? (LO4) 20. Integrative. Big Door Company has 10 million shares outstanding, which are currently trading for about $15 per share and have an equity beta of 1.2. Big Door has 20,000 outstanding bonds, with a 6 percent coupon rate, payable semi-annually and due in 10 years. The bonds are rated BBB. Currently the credit spread for BBB is 150 basis points over equivalent-maturity Government of Canada debt. The current yield on 10-year Canada bonds is 4 percent, compounded semi-annually. The risk-free interest rate is 2.5 percent, and the market risk premium is 6.5 percent. The company has a 35 percent tax rate. a. Calculate Big Door’s WACC. (LO4) b. Calculate Big Door’s unlevered beta, using the for- mula in footnote 6. (LO3) c. If Big Door was 50 percent debt-financed, what would be its WACC? Assume that the beta of its debt is unchanged by the capital structure change. (LO4) 21. Comprehensive. Two ambitious business graduates, Boris and Isabelle, are considering purchasing Premier

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