Projects Firm Undertake
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Problem:Please complete all of the problems on the attached spreadsheet, please include formulas on the spreadsheet and put answers on the spreadsheet underneath each question. Please complete all ...there is moreshow problemPlease complete all of the problems on the attached spreadsheet, please include formulas on the spreadsheet and put answers on the spreadsheet underneath each question. Please complete all of the problems.
Calculate the cost of capital:
Chapter 8: Problem Sets
(pp. 210 and 212)
Problem A1 (Calculating the WACC) The required return on debt is 8%, the required return on equity is 14%, and the marginal tax rate is 40%. If the firm is financed 70% equity and 30% debt, what is the weighted average cost of capital?
Problem A7: (Finding NPVs with differing project risks) Assume the expected return on the market portfolio is 15% and the riskless return is 9%. Also assume that all of the projects listed here are perpetuities with annual cash flows (in $) and betas as indicated. None of the projects requires or precludes any of the other projects, and each project costs $2,000.
a. What is the NPV of each project?
b. Which projects should the firm undertake?
PROJECT A B C D E F
Annual cash flow 310 500 435 270 385 450
Beta 1.00 2.25 2.22 0.65 1.37 2.36
Problem B9: (Estimating the WACC) Fuerst Cola has 10,000 bonds and 400,000 shares outstanding. The bonds have a 10% annual coupon, $1,000 face value, $1,050 market value, and 10-year maturity. The beta on the stock is 1.30 and its price per share is $40. The riskless return is 6%, the expected market return is 14%, and Fuerst Cola's tax rate is 40%.
a. What is the after-tax cost of debt financing?
b. What is the after-tax cost of equity financing?
c. What is the WACC?
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