A4.(Estimating the WACC with three sources of capital) Eschevarria Research has the capital structure given here. If Eschevarria’s tax rate is 30%, what is its WACC?

Â Book Value Market Value Before-Tax Cost

Bonds

$1,000

$1,000

8%

Preferred stock

400

300

9%

Common stock

600

1,700

14%

B12.(Leveraged returns) You have a chance to make a $70,000 one-year investment. The investment is expected to earn 15%, and there are no taxes. If you borrow $45,000 at 9% and put up the other $25,000 with your own money, what will be your expected return on the $25,000?

A10.(NPV) An investment of $25 will generate an annual cash flow of $2 forever. If the cost of capital is 7%, what is the NPV of this investment?

B4.(NPV and shareholder wealth) Stockholders are surprised to learn that the firm has invested $43 million in a project that has an expected payoff of $8 million per year for six years. The project’s cost of capital is 12%.

1. What is the project’s NPV?

2. There are 3 million outstanding shares. What should be the direct impact of this investment on the per-share value of the common stock?

A4.(Net investment outlay) The cost of a new machine is $70,000 plus an additional $8,000 for freight and setup costs. The old machine that is being replaced has a book value of $15,000 and can be sold for $7,000. An investment of $15,000 in working capital is also required. The marginal tax rate is 30%. What is the net investment outlay?

A9.(EAC) The total present value of all costs associated with an asset over a seven-year life is $73,285. If the asset has a cost of capital of 11%, what is the EAC of using this asset?

Â Book Value Market Value Before-Tax Cost

Bonds

$1,000

$1,000

8%

Preferred stock

400

300

9%

Common stock

600

1,700

14%

B12.(Leveraged returns) You have a chance to make a $70,000 one-year investment. The investment is expected to earn 15%, and there are no taxes. If you borrow $45,000 at 9% and put up the other $25,000 with your own money, what will be your expected return on the $25,000?

A10.(NPV) An investment of $25 will generate an annual cash flow of $2 forever. If the cost of capital is 7%, what is the NPV of this investment?

B4.(NPV and shareholder wealth) Stockholders are surprised to learn that the firm has invested $43 million in a project that has an expected payoff of $8 million per year for six years. The project’s cost of capital is 12%.

1. What is the project’s NPV?

2. There are 3 million outstanding shares. What should be the direct impact of this investment on the per-share value of the common stock?

A4.(Net investment outlay) The cost of a new machine is $70,000 plus an additional $8,000 for freight and setup costs. The old machine that is being replaced has a book value of $15,000 and can be sold for $7,000. An investment of $15,000 in working capital is also required. The marginal tax rate is 30%. What is the net investment outlay?

A9.(EAC) The total present value of all costs associated with an asset over a seven-year life is $73,285. If the asset has a cost of capital of 11%, what is the EAC of using this asset?

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