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WACC, Projected Dividends, Borrowing Cost, NAL, Equipment Lease

PROBLEM SETS: PLEASE SHOW ALL WORK IN EXCEL & EXPLAIN INPUT VARIABLES.

1. ABC has an unleveraged required return of 45%. ABC rebalances its capital structure each year to a target of L = .55. T* = .15. ABC can borrow currently at a rate of rd = 11%. What is ABC's WACC?

2. ABC has made a bundle selling software and has begun paying cash dividends. The firm's CFO would like the firm to distribute 30% of its annual earnings (POR = .30) and adjust the dividend rate to changes in EPS at the rate of ADJ = .50. ABC paid $1.25 per share in dividends last year. It will earn at least $7.00 per share this year and each year in the foreseeable future. Calculate projected dividends for the current year PLUS the next four.

3. ABC has two financing alternatives. Calculate APY for each alternative. Which offers the lower borrowing cost?
a. A publicly placed $100 million bond issue. Issuance costs are $1.5 million; the bonds have a 10% coupon paid semi-annually with a 30-year life.
b. A privately placed $100 million bond issue. Issuance costs are $2.1 million; the bonds have a 10.5% annual coupon rate with a 30-year life.

4. A firm can issue 10-year public debt at par with a 12% coupon in the domestic market. It can also issue 12.75% Eurobonds. Calculate APY for each alternative. Which offers the lower borrowing cost?

5. ABC is considering leasing a computer system that costs $1.5 million dollars new. The lease requires annual payment of $175,000 in arrears for 10 years. ABC's tax rate is 40%. If it purchased the computer system, it could depreciate it to its residual value over 10 years. ABC's cost of debt is 9% and its WACC is 12%.
c. Calculate the NAL assuming a ZERO residual value. Should ABC lease?
d. Calculate the NAL assuming a $250,000 residual value. Should ABC lease?

6. ABC is considering whether to lease a delivery truck. The cost of the truck is $65,000. ABC has proposed a 5-year lease that calls for annual payments of $14,500 at the BEGINNING of each year. ABC could depreciate the truck to $10,000 at the end of 5 years on a straight-line basis and claim a depreciation deduction. ABC's tax rate is 40%.
e. Calculate NAL. Should ABC lease the truck?
f. Suppose ABC does not pay taxes. Calculate NAL. Should ABC lease the truck?

Solution Summary

The solution determines the WACC, projected dividends, borrowing cost, NAL, and equipment lease.

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