25 May Question 1. Wheel Industries is considering a three year expansion p
Question
1. Wheel Industries is considering a three year expansion project.
The project requires an initial investment of $1.5 million. The project will use straight line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million and has costs of $600,000.
The tax rate is 35%. Calculate the cash flows for the project. If the discount rate is 6% calculate the NPV of the project.
2. Clinton Co. has just paid a dividend of $2.50 per share. The dividends are expected to grow at a constant rate of 6% per year for ever. If the stock is currently selling for $50 per share, calculate the cost of equity for the firm
3. The Jersey Co‘s common stock has beta of 1.25. The risk free rate is 4% and the expected return on the market is 12%. What is the firm’s cost of equity?
4. The WW Inc. has 9% coupon bonds outstanding. They have a maturity of 13 Years and are selling for $1,080. The face value is $1,000 and the interest is paid semi-annually. Calculate the cost of debt on a pre-tax basis. What will be the after tax cost of debt if the tax rate is 35%?
5. BW Co. has a target debt –equity ratio of 0.6. Its cost of debt is 12% and its cost of equity is 20%. If the corporate tax rate is 34%, what is the firm’s WACC?
6. MW Co. has a target capital structure of 35% common equity, 10% preferred equity and 55% debt. The cost of common equity is 18%, the cost of preferred equity is 8% and the pre-tax cost of debt is 10%.
If the corporate tax rate is 35%, what is MW’s WACC?
If the firm has a project with an IRR of 12% would you accept the project?
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