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How cost of capital financing technique affects organization

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Reference no: EM13842903

1. LL Incorporated's currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL's after-tax cost of debt? Explain how cost of capital financing techniques affects the organization.

2. A project has an initial cost of $52,125, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 12%. What is the project's NPV? Hint: Begin by constructive a time line.) Explain how to use capital budgeting and relevant cash flow to compare investment alternatives.

3. Ethier Enterprise has an unlevered beta of 1.0. Ethier is financed with 50% debt and has a levered beta of 1.6. If the risk-free rate is 5.5% and the market risk premium is 6%, how much is the additional premium that Ethier's shareholders require to be compensated for financial risk? Explain how varying degrees of financial risk may command variations in shareholder return expectations.

Reference no: EM13842903

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