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ABC Corporation

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

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