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Financial Management

Langston Labs has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and Langston evaluates low-risk projects with a WACC of 8%, average projects at 10%, and high-risk projects at 12%. The company is considering the following projects:

Project Risk Expected Return
A High 15%
B Average 12
C High 11
D Low 9
E Low 6

Which set of projects would maximize shareholder wealth?
A. A & B
B. A, B & C
C. A, B and D
D. A, B, C, and D
E. A, B, C, D & E

Your company, Q4 Inc., is considering a new project whose data are shown below. The required equipment has a 3-year tax life, and the MACRS rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project's 10-year operating life. What is the project's operating cash flow during Year 4?
Equipment cost (depreciable basis) $70,000
Sales revenues, each year $50,000
Operating costs excl. depr'n $25,000
Tax rate 35.0%

A. $16, 213 B. 17,067 C. 17,965 D. 18,863 E. 19,806

California Hideaways is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.)
WACC 10.0 %
Net investment cost (depreciable basis) $65,000
Straight-line depr'n rate 33.3333%
Sales revenues, each year $60,000
Operating costs excl. depr'n, each year $25,000
Tax Rate 35.0%

A. $8,499 B. $8,946 C. $9,417 D. $9,913 E $10,340

Mihov Inc. hired you as a consultant to help estimate its cost of capital. You have been provided with the following data. (1): rd = yield on the firm's bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) rRF = 5.00%, RPM = 6.00%, and b = 1.25. (3) D1 = $1.20; P0 = $35.00 and g = 8.00% (constant). You were asked to estimate the cost of equity based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?

A. 1.13% B. 1.50% C. 1.88% D. 2.34% E. 2.58%

Solution Preview

1. The firm should take those projects where the expected return is more than the firm's cost of capital. A is good as 15% is greater than 12%. B is good as 12% is greater than 10%. C is not good as 11% is less than 12%. D is good as 9% is greater than 8%. E is not good as 6% is less than 8%. So the valid projects that the firm should undertake are:A,B and D. ...

Solution Summary

The solution goes into a great amount of detail related to the financial management question being asked. The solution is very easy to follow along and can be easily understood by anyone with a basic understanding of the concepts. The solution answers all the question(s) being asked in a succinct way. Overall, an excellent response.

$2.19