A2. (Calculating the WACC) The following values apply to the Drop Corporation rd=7.5%, rt= 13%, T=38%, D=$100, and E=$200. What is the weighted average cost of capital?

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?

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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