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# Projects Firm Undertake

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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?