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Chapter 8

Problems A 1

(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?

A 4

(Estimating the WACC with three sources of capital) Eschevarria Research has the capital structure given here. If Eschevarria's tax rate is 30%, what is its WACC?

Book Value Market Value Before-Tax Cost
Bonds $1,000 $1,000 8%
Preferred stock 400 300 9%
Common stock 600 1,700 14%

Chapter 9

Problems A 4

(Investment criteria) An investment of $100 returns exactly $100 in one year. The cost of capital is 10%.

1. What are the payback, NPV, and IRR for this investment?
2. Is this a profitable investment?

Chapter 10

Problem A 1
(Net income and net cash flows) Julie Stansfield has a bicycle rental shop with annual revenues of $200,000. Cash operating expenses for rent, labor, and utilities are $70,000. Depreciation is $40,000. Julie's tax rate is 40%.

1. What should be Julie's net income?
2. What is her net cash flow?

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Solution Summary

The solution explains some questions in finance relating to WACC, Payback, NPV, IRR, net income, net cash flow

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Chapter 8,

Problems A 1;

(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?

WACC = Proportion of debt X after tax cost of debt + Proportion of equity X cost of equity
= 0.3 X 8% X (1-0.4) + 0.7 X 14%
= 11.24%

A 4;

(Estimating the WACC with three sources of capital) Eschevarria Research has the capital structure given here. If Eschevarria's tax rate is 30%, what is its WACC?
Ã? Book Value Market Value Before-Tax Cost
Bonds $1,000 $1,000 8% ...

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