# Finance: Capital budgeting.

Please show work preferably all on excel

A1. (Calculating the WACC) The required return on debt is 8%, the required return on equity

is 14%, and the marginal tax rate is 40%. If the firm is financed 70% equity and 30% debt,

what is the weighted average cost of capital?

A2. (Calculating the WACC) The following values apply to the Drop Corporation: rd = 7.5%,

re = 13%, T = 38%, D = $100, and E = $200. What is the weighted average cost of capital?

A4. (Estimating the WACC with three sources of capital) Eschevarria Research has the capital

structure given here. If Eschevarria's tax rate is 30%, what is its WACC?

BOOK VALUE MARKET VALUE BEFORE-TAX COST

Bonds $1,000 $1,000 8%

Preferred stock 400 300 9%

Common stock 600 1,700 14%

B13. (Leveraged returns) You have a chance to make a $25,000 one-year investment. The investment

is expected to earn 18%, and there are no taxes. If you borrow $10,000 at 10% and

put up the other $15,000 with your own money, what will be your expected return on the

$15,000?

A2. (Mutually exclusive projects) Consider the cash flows given below for the mutually exclusive

projects, S and L.

a. If the cost of capital is 10%, what is the NPV of each investment?

b. What is the IRR of each investment?

c. Which investment should you accept?

YEAR 0 1 2

Project S − 100 160 0

Project L − 100 0 200

A7. (NPV and IRR) A project is expected to generate cash flows of $14,000 annually for five

years plus an additional $27,000 in year 6. The cost of capital is 10%.

a. What is the most that you can invest in this project at time 0 and still have a positive

NPV?

b. What is the most that you can invest in this project at time 0 if you want to have a 15%

IRR?

B9. (NPV) Bill Scott estimates that a project will involve an outlay of $125,000 and will return

$40,000 per year for six years. The required return is 12%.

a. What is the NPV using Bill's estimates?

b. David Scott is less optimistic about the project. David thinks the outlay will be 10%

higher, the annual cash flows will be 5% lower, and the project will have a five-year

life. David does agree with Bill's required return. What is the NPV using David's

estimates?

B17. (Excel: Finding NPV and IRR) Kennesaw Instrument Company is looking at six projects

with the following cash flows (investment outlays are negative cash flows):

TIME 0 1 2 3 4 5 6 7 8

Project A − -10 2 3 4 5 4 3 2 1

Project B − -8 -3 5 5 5 2 0 0 0

Project C − -45 25 20 15 5 0 0 0 0

Project D − -1 2 2 2 0 0 0 0 0

Project E − -30 6 6 6 6 6 0 0 0

Project F − -10 -20 5 5 8 8 8 8 8

The cost of capital for all of the projects is 10%.

a. Calculate the NPV for the six projects.

b. Calculate the IRR for the six projects.

c. Calculate the MIRR for the six projects.

A1. (Net income and net cash flows) Julie Stansfield has a bicycle rental shop with annual revenues

of $200,000. Cash operating expenses for rent, labor, and utilities are $70,000.

Depreciation is $40,000. Julie's tax rate is 40%.

a. What should be Julie's net income?

b. What is her net cash flow?

B1. (Capitalizing versus expensing) BeyTravel Agency is a small firm owned by David Bey that has

just purchased $20,000 worth of computer upgrades. Under current tax laws, Bey has a choice

of expensing or depreciating a small investment such as this. Bey's marginal tax rate is 40%.

a. What is the present value of the depreciation tax shield if the computers are depreciated

straight line over the next five years? The cost of capital is 10%.

https://brainmass.com/business/weighted-average-cost-of-capital/finance-capital-budgeting-379374

#### Solution Summary

The problem set deals with topics under finance: capital budgeting and capital structure.

Finance: Capital Budget Process

Need to see step by step equation solutions.

Data:

rd= 10%

T= 40%

FX1= 96.57 ¥

FX0= 95.72 ¥

Dps= 139.19 ¥ per share, selling at 1,000 ¥ per share; the underwriting cost is 7%, or 70 ¥

Pn= 930 ¥

Original Bond Yield: 12%

Risk Premium: 1.5%

rRF= 5%

RPM= 6.5%

bi= 1.75

RPW= 3.83%

biW= 1.44

n = 3 years

CF1= -300,425 ¥

CF2= -60,190 ¥

CF3= 210,515 ¥

Inventory Increases = 455,000 ¥

A/R Increases = 890,000 ¥

A/P & Current Liabilities Increases = 1,375,000 ¥

Net Operating Profits = 12,565,235 ¥

Net Fixed Assets = 11,730, 275 ¥

NOCF3= 70,165 ¥

g = 185%

S3= 90,175 ¥

Fixed Costs = 845,000 ¥

Variable Costs per Unit = 55 ¥

P = 110 ¥

BE = 10425 Units

Payback Period = 2.35 Years

Questions:

1.Calculate the After Tax Cost of Debt for a domestic-only company

2.Calculate the After Tax Cost of Debt for an internationally-based company with debt denominated in a foreign currency

3.Compare & Contrast the Cost of debt for a domestic-based with an international-based company. What do the numbers tell you about doing business internationally as opposed to domestically?

4.Calculate the Cost of Preferred Stock

5.Calculate the Cost of Equity using the Company Bond Yield, Risk Premium Approach, then calculate the Cost of Equity using the [domestic-only] CAPM, and then calculate the Cost of Equity using the Global CAPM

6.Contrasting & comparing the three values for the cost of equity should provide insight into the accuracy of forecasting & valuating the companyâ??s equity. What are those insights?

7.Calculate the Weighted Average Cost of Capital using both the domestic-only and then the international-based CAPM. (Use the little chart I made for you in the Capital Budget Process document. Itâ??s easier to organize the work this way.)

8.Calculate the NPV and IRR for this project.

9.Calculate the Net Operating Working Capital, Free Cash Flow, and salvage value for the project.

10.Calculate the break-even point for this project. Then, if the company were to set the break-even point, and wanted to know at what price they should set the commodity to achieve that break-even point, calculate the price at the company-set break-even point. If the industry average units per year manufactured is 5,000 units annually, is this an efficient operation? Why or why not?

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