Purchase Solution

Cost of Capital and Net Present Value (NPV)

Not what you're looking for?

Ask Custom Question

I have a few problems to work on for my practice class. Please show me your steps to the solution/formulas use. Thank you.

Problem #1

The market value of Charcoal Corporation's common stock is 20 million, and the market value of its risk-free debt is $5 million. The beta of the company's common stock is 1.25, and the market risk premium is 8%. If the treasury bill rate is 5%, what is the company's cost of capital. (Assume no taxes.)

Problem #2

A project requires an initial investment in equipement of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t=0). The project is expected to produce sales revenues of $120,000 for each of the three years. Manufacturing costs are estimated to be 60% of revenues. The assets are depreciated using straight-line depreciation without any salvage value. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 15%.

Calculate the NPV of the project.

Purchase this Solution

Solution Summary

The cost of capital and net present values are examined.

Solution provided by:
Education
  • Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
  • Bachelor of Commerce, West Bengal University
Recent Feedback
  • "I got this feedback and I wanted to know if you can explain it to me. I noticed something within your workings which I believe is incorrect.  It looks like you've mistaken the Debt ratio for the Equity Multiplier.  You've done a calculation to determine Return on Equity (ROE) but if you take a look at the ratios provided for us you'll see ROE listed on the bottom line already.  You can use ROE, Profit Margin and Total Asset Turnover to figure out the Equity Multiplier amount.  Equity multiplier is not provided for us and we need to calculate it.  I really hope this is helpful to you.  "
  • "Very attentive to detail. Answers are designed in easy to understand format."
  • "Fast response and thorough answer"
  • "thank you very much! "
  • "thank you so much !!!!!!!"
Purchase this Solution


Free BrainMass Quizzes
IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Motivation

This tests some key elements of major motivation theories.

Basics of corporate finance

These questions will test you on your knowledge of finance.