# 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.