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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 Preview

    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% ...

    Solution Summary

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

    $2.19

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