# Question 1:Question 2:Question 3:

Home depot expects to have sales this of $20million under its current credit policy. The present terms are net30; the DSO is 45 days, and the bad debt loss percentage is 3%. Also, Home Depot's cost of capital is 10%, and its variable costs total 70% of sales, Since Home Depot wants to improve its profitability, a proposal has been made to offer a 2% discount for payment within 15 days; that is, change the credit terms to 2/15, net 30. It predicts that sales would increase by 10% and that 75% of all customers would take the discount. The new DSO would be 35 days, and the bad debt loss percentage on all sales would fall to 1%. What are the incremental pre-tax profits from this proposal?

Doritos is considering to produce a new flavor for its nacho chips and the following information are provided. the equipment has a constant capital cost allowance over its 3-year life with a zero-salvage value. No new working capital would be required. Revenues and cash operating costs are expected to be constant over the project's 3year life. However, this project would compete with other products form Doritos and would reduce the company's pre-tax annual cash flows. What is the project's NPV? (hint: Cash flows are constant in years 1 to 3. Actual CCA varies. The proposed CCA IS FOR COMPUATIONAL CONVENIENCE

Samsung hired you as a consultant to help estimate its cost of capital (WACC). You have been provided with the following data:

1. Samsung currently has one type of bond outstanding. The bond is marking semi-annual coupon payment. It has 20 years left until maturity and is carrying a7.25% coupon rate. It currently has a yield-to maturity of 8.57%. The bond has a book value of $40 million as indicated on the balance sheet.

2. A typical saving account at a bank is offering an interest rate of 1.5%, GIC is currently offering a return of 2.5% and a 25-year Government of Canada bond is currently yielding at 5.5%.

3. The beta of Samsung's stock is 1.25 and the expected return of the market index such as TSX composite index is 11.5%.

4. There is currently 10 million shares of Samsung stock trading publicly on the TSX stock exchange. Samsung is expected to pay a dividend of $1.2 per share nest year. The actual market price of Samsung IS considered undervalue because the actual return is 16% which is different than the expected return of the stock.

5. The tax rate associated with Samsung is 40%

What is the AVCC of Samsung ?

**Question 4:** Starbucks's current capital structure consists of 70% debt and 30% common equity, it has a beta of 1.50 and its tax rate is 40%. However, the CFO thinks the company has too much debt, and he is considering moving to a capital structure with 35% debt and 65% equity. The risk-free rate is 4.0% and the market risk premium is 5.0%. By how much would the firm's cost of equity change as a result of altering its capital structure ?(i.e., what's the cost of equity when the firm is at 70% debt, what's the cost of equity will be when the firm is at 35% debt, and so what is the difference)

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