A4 (Estimating the WACC with three sources of capital) Eschevarria Research has the capital structure given here. If EschevarriaÂs tax rate is 30%. What is its WACC? Book Value Market Value Before-Tax CostBonds $1000 $1000 8%Preferred stock 400 300 9%Common stock 600 1700 14%B13. (Leveraged returns) You have a chance to make a $25,000 one year investment. The investment is expected to earn 18%, and there are no taxes. If you borrow $10,000 at 10% and put up the other $15,000 with your own money, what will be your expected return on the $15,000?A2. (Mutually exclusive projects) Consider the cash flows gives below for the mutually exclusive projects, S and L.a. If the cost of capital is 10%, what is the NPV of each investment?b. What is the IRR of each investment?c. Which investment should you accept?Year 0 1 2Project S -100 160 0Project L -100 0 120
A7. (NPV and IRR) A project is expected to generate cash flows of $14,000 annually for five years plus additional $27,000 in year 6. The cost of capital is 10%.a. What is the most that you can invest in this project at time 0 and still have a positive NPV?b. The cost of capital is 10%.b. What is the present value of the tax saving if the computer are expensed immediately?c. Would you recommend that Bey expense or capitalize this investment?B16(Interest-rate risk) Philadelphia Electric has many bonds trading on the New York StockExchange. Suppose PhilElÂs bonds have identical coupon rates of 9.125% but that one issuematures in 1 year, one in 7 years, and the third in 15 years. Assume that a coupon paymentwas made yesterday.a. If the yield to maturity for all three bonds is 8%, what is the fair price of each bond?b. Suppose that the yield to maturity for all of these bonds changed instantaneously to 7%.What is the fair price of each bond now?c. Suppose that the yield to maturity for all of these bonds changed instantaneously again,this time to 9%. Now what is the fair price of each bond?d. Based on the fair prices at the various yields to maturity, is interest-rate risk the same,higher, or lower for longer- versus shorter-maturity bonds?
This question was asked on Apr 29, 2010.
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