Three separate projects each have an initial cash outlay of $10,000. The cash flow for Peter's project is $4,000 per year for three years. The cash flow for Paul's Project is $2,000 in years 1 and 3 and $8,000 in year 3. Mary's Project has a cash flow of $10,000 in year 1, followed by $1,000 each year for years 2 and 3.

a. Use the payback method to calculate how many years it will take for each project to recoup the initial investment.
b. Which project would you consider most liquid?

Problem 9-18 --> Weighted Average Cost of Capital

Alvin C. York, the founder of York Corporation, thinks that the optimal capital structure of his company is 30 percent debt, 15 percent preferred stock, and the rest common equity. If the company is in the 40 percent tax bracket, compute its weighted average cost of capital given that:

a. YTM of its debt is 10 percent

b. New preferred stock will have a market value of $31, a dividend of $2 per share, and flotation costs of $1 per share.

c. Price of common stock is currently $100 per share, and new common stock can be issued at the same price with flotation costs of $4 per share. The expected dividend in one year is $4 per share, and the growth rate is 6 percent.

Assume the addition to retained earnings for the current period is zero.

***Please use excel for answers and show all formulas****

Solution Summary

This solution illustrates how to compute the payback period of a project and how to compute a corporation's weighted-average cost of capital if the preferred stock and common stock issuances incur flotation costs.

Project SS costs $52,125, its expected net cash flows are $12,000 per year for 8 years, its WACC is 12%.
What is the project's NPV?
IRR?
MIRR?
PaybackPeriod?
Discounted PaybackPeriod?
(Show calculations)

XYZ is evaluating a project with the following annual net cash flows:
0 year=-$600
1 year=$50
2 year=$100
3 year=$150
4 year=$350
5 year=$100
1) XYZ is a small company with limited resources, its managers are concerned about how capital will be tied up in projects. What is the project's paybackperiod? Assume XYZ's ca

Assume a project has normal cash flows. All else equal, which of the following statements is correct?
-The projects IRR increases as the WACC declines
- The projects NPV increases as the WACC declines
- The projects MIRR is unaffected by changes in WACC
-The projects regular payback increases as the WACC declines

What are the three potential flaws with the regular payback method? Does the discounted payback method correct all three flaws? Explain.
Why is the NPV of a relatively long-term project (one for which a high percentage of its cash flows occurs in the distant future) more sensitive to changes in WACC than that of a short-term

A company with $2,000,000 in operating assets is considering purchasing a machine that costs $300,000 and which is expected to reduce operating costs by $60,000 each year. The paybackperiod for this machine in years is closest to ______?

Flash Company wants to purchase a new computer that will allow the company to do in-house printing rather than sub-contract the work out to a printer. The machine will cost $45,000. FLash also believes there will be substantial savings on printing costs over the five-year life of the machine.
Savings are anticipated at:

Project A has an internal rate of return of 15 percent. Project B has an IRR of 14 percent. Both projects have a cost of capital of 12 percent. Which of the following statements is most correct?
a. Both projects have a positive net present value.
b. Project A must have a higher NPV than Project B.
c. If the cost of capit

A) Valuation of a constant growth stock - A stock is expected to pay a dividend of $0.50 at the end of the year (that is D1 = 0.50), and it should continue to grow at a constant rate of 7 percent a year. If its required return is 12 percent, what is the stock's expected price 4 years from today?
B) Cost of common