Calculate the waac, Financial Management

Question 1:

You hold a diversified portfolio consisting of a Rs.5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.15. You have decided to sell one of your stocks, a lead mining stock b=1.0, for Rs.5,000 net and to use the proceeds to buy Rs.5,000 of stock in a steel company whose b=2.0. What will be the beta of the portfolio?

Question 2:

Suppose Indus Motor Company sold an issue of bonds with a 10-year maturity, a Rs.1,000 par value, a 10% coupon rate and  semiannual interest payments.

(a)    Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell?

(b)   Suppose that 2 years after the initial offering, the going interest rate had risen to 12%. At what price would the bonds sell?

(c)    Suppose that the conditions in part an existed - that is, interest rates fell to 6% 2 years after the issue date. Suppose further that the interest rate remained at 6% for the next 8 years. What would happen to the price of the Indus Motor Company bond overtime?

Question 3:

Babar Corporation's present capital structure, which is also its target capital structure I, is 40% debt and 60% common equity. Next year's net income is projected to be Rs.21,000, and Babar's payout ration is 30%. The company's earnings and dividends are growing at a constant rate of 5%; the last dividend (Do) was Rs.2.00; and the current equilibrium stock price is Rs.21.88. Babar can raise all the debt financing its needs at 14.0%. If Babar issues new common stock, a 20% floatation cost will be incurred. The firm's marginal tax rate is 40%.

(a)    What is the maximum amount of new capital that can be raised at the lowest component cost of equity? (In other words, what is the retained earnings break point?)

(b)   What is the component cost of the equity raised by selling new common stock?

(c)    Assume that at one point along the marginal cost of capital schedule, the component cost of equity is18%. What is WAAC at that point?

Question 4:

Faheem INC. expects EBIT of Rs.2,000,000 for the coming year. The firm's capital structure consists of $0% debt and 60% equity, and its marginal tax rate is 40%. The cost of equity is 14% and the company pays a 10% rate on its Rs.5000,000 of long-term debt. One million shares of common stock are outstanding. In its next capital budgeting cycle, the firm expects to fund one large positive NPV project costing Rs.1,200,000, and it will fund this project in accordance with its target capital structure. If the firm follows a residual dividend policy and has no other projects, what is its expected dividend payout ratio?

Question 5:

Here is a book balancesheet for dawood associates. Figures are in millions.


Liabilities and share holders' equity

Assets (book value)            Rs.75



Debt                                         Rs.25

Equity                                       Rs.50


Unfortunately, the company has fallen on hard times. The 6 million shares are trading for only Rs, 4 apiece, and the market value of its debt securities is 20% below the face (book) value. Because of the company's large cumulative losses, it will pay no taxes on future income. Suppose shareholders now demand a 20% expected rate of return. The bonds are now yielding 14%. What is the weighted-average cost of capital?

(b) Calculate the WAAC for Dawood Associates assuming the companies face a 35% corporate income tax rate.

(b) After a long drought, the manager of Rahim Farm is considering the installation of an irrigation system which will cost Rs. 100,000. it is estimated that the irrigation system will increase revenues by Rs.20,500 annually, although operating expenses other than  depreciation will also increase by Rs.5,000. the system will be depreciated using MARCS over its depreciable life (5 years) to a zero salvage value. If the tax rate on ordinary income is 40%, what is project's IRR?

Posted Date: 2/22/2013 4:58:50 AM | Location : United States

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