See attached Excel file for proper format.
8. WACC. The common stock of Buildwell Conservation& Construction, Inc., has a beta of .90.
The Treasury bill rate is 4% and the market risk premium is estimated at 8%. BCCI's cost of equity capital? Its WACC? Buildwell pays tax at 40%
9. WACC and NPV. BCCI (see the previous problem) is evaluating a project with an internal rate of return of 12%.
Should it accept the project? If the project will generate a cash flow of $100,000 a year for 8 years, what is the most BCCI should be willing to pay to initiate the project?
10. Company Valuation. You need to estimate the value of buildwell Conservation (see Practice Problem 8).
You have the following forecasts (in millions of dollars) of buildwell's profits and of its future investments in new plant and working capital:
1 2 3 4
Earning before interest, taxes depreciation
and amortization (EBITDA) 80 100 115 120
Depreciation 20 30 35 40
Pretax Profit 60 70 80 80
Investment 12 15 18 20
From year 5 onward, EBITDA, depreciation, and investment are expected to reamain unchanged at year-4 levesl. Estimate the company's total value and the separate values of its debt and equity
14. Cost of Equity. Bunkhouse Electronics is a recently incorporate firm that makes electronic entertainment systems.
Its earnings and dividends have been growing at a rate of 30%, and the current dividend yield is 2%.
Its beta is 1.2, the market risk premium is 8%, and the risk-free rate is 4%
a) Calculate two estimates of the firm's cost of equity.
b) Which estimate seems more reasonable to you? Why?
16. Capital Structure. Examine the following book-value balance sheet for University Products, Inc.
What is the capital structure of the firm on the basis of market value? The preferred stock currently sells por $15 per share and the common stock for $20 per Share.
There are 1 million common shares outstanding
BOOK VALUE BALANCE SHEET
(all values in millions)
Assets Liabilities and Net Worth
Cash and short-term securities $1 Bonds, coupon= 8%, paid
annually (aturity=10 years,
current yield to maturity=9% $10.00
Accounts receivable 3 Preferred stock (par value$20
per chare) 2
Inventories 7 Common stock (par value$.10
Plant and equipment 21 Additional paid-in stockholders'
Retained earnings 10
Total $32 Total $32.00
Solution helps in estimating WACC, NPV, BCCI, Valuation, Cost of equity, Capital structure