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    ABC Corporation

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    As the director of capital budgeting for ABC Corporation, you are evaluating two mutally exclusive projects with the following net cash flows:

    A B
    200,000 -125,000
    65,000 60,000
    60,000 40,000
    50,000 40,000
    65,000 35,000
    50,000 45,000
    If ABC corp cost capital is 12%, defend which project would you choose.

    A company has determined that its optimal capital structure consits of 50% debt and 50% equity. Given the following information, calculate the firm's WACC.

    R/d=7%
    tax rate= 40%
    Po=$30
    Growth=0%
    Do=$2.50

    Bingo Corp is determining whether to support $150,000 of permanent current assets with a bank note or short-term bond. The firm's bank offers a two yr note where the firm will receive $150,000 and 175,000 at the end of two yrs. The firm has the options to renew the loan at market rates. Alternatively, Bingo can sell 8.5% coupon bond with a 2yr maturity and 1,000 par value at a price of $973.97. How many points lower is the int rate on the less expensive debt instrument?

    Payback Period
    Haig Aircraft is considering a project which has an up front cost paid today at t=0. the project will generate positive csh flow of 60,000 a yr at the end of each of the next five yrs. The project's NPV is 75,000 and the company's WACC is 10%. What is the project 's simple, regular payback?

    Which of the following statements is the most correct and why?

    A.If a bond sells for less than par, then its yield to maturity is less tha its coupon rate.
    B. If a bonds sell at par, then its current yield will be less than yield to maturity.
    C. Assuming that both are held to maturity and are equal risk, a bond selling for more than par with ten yrs to maturity will have a lower current yield and higher capital gain relative to bond that sells at par.
    D.Anwers are A and C
    E. None of the anwers above

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    Solution Preview

    NPV (WACC)
    As the director of capital budgeting for ABC Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:

    A B
    200,000 -125,000
    65,000 60,000
    60,000 40,000
    50,000 40,000
    65,000 35,000
    50,000 45,000

    If ABC corp cost capital is 12%, defend which project would you choose.
    I will choose Project A because its NPV is $411,136.38 while Project B's NPV is only $36,707.73. Please see the attached excel file.

    A company has determined that its optimal capital structure consist of 50% debt and 50% equity. Given the following information, calculate the firm's WACC.

    R/d=7%
    tax rate= 40%
    Po=$30
    Growth=0%
    Do=$2.50

    cost of equity = 2.50/30 = ...

    Solution Summary

    This solution is comprised of a detailed explanation to calculate the firm's WACC.

    $2.19

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