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Company ABC has 3-year bonds outstanding. The bond’s coupon rate is 10% and it is selling at $1,000. The total value of the bonds is $10M. The company also has preferred stocks, which are worth $5M. The preferred stock pays a dividend of $2 a share and currently sells at $20 a share. The common stocks of the company are worth $20M. The beta of the common stock is .8, the market risk premium is 10%, the risk free rate is 6%, and the firm’s tax rate is 40%.
(1) What is the company’s WACC?
(2) If an average-risk project will produce a 10% rate of return, should the firm carry out the project? Explain.
(3) Should the firm invest in an average-risk project that will require an initial investment $1M and provide an annual cash flow of $100k for 15 years? Explain.
(4) How much should the firm pay for an average-risk project that will generate the following annual cash flows for five years: CF1 = 200, CF2 = 300, CF3 = 400, CF4 = 500, CF5 = 800.
An alumni wants to establish a scholarship that covers the full cost of tuition for one high achiever each year in perpetuity. The university, on the advice of the Finance Department has opted to begin awarding it in 5 years. This year, the estimated..
Systematic versus Unsystematic Risk (LO2, CFA4) Consider the following information on Stocks I and II:
Which of the following policies did the United States adopt during the Cold War?
question 1the underlier is trading at a spot price of 100. the ten year riskless interest rate is trading at 10 p.a.
Deci-Bell, Inc. is producing new headphones. Deci-Bell Inc. has a base level of sales of 312,464 units. Sales price per unit is $148.61 and variable cost per unit is $61.52. Total annual operating fixed costs are $6,294,441.
Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, assets (which is equal to its total invested capital) to be $200,000, and its tax rate to be 35%. Assuming t..
Clark Communications has a capital structure that consists of 70% common stock and 30% long-term debt. In order to calculate Clark's WACC, an analyst has accumulated the following information: The company currently has a 30-year bond issue outstandin..
A company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $18,000 the first year, $20,000 the second year, $23,000 the third year, -$8,000 the fourth year, $30,000 the fifth year, $36,000 the sixth year..
Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $120,000 and sell its old low-pressure glueball, which is fully depreciated, for $20,000. What is the equivalent annual savings from the purchase..
A security produced returns of 12 percent, -11 percent, -2 percent, 15 percent, and 9 percent over the past five years, respectively. Based on these five years, what is the probability that an investor in this stock will lose more than 17.06 percent ..
Assume that the average firm in your company's industry is expected to grow at a constant rate of 5% and that its dividend yield is 6%. Your company is about as risky as the average firm in the industry and just paid a dividend (D0) of $2.5. What is ..
The Market Place is considering a new four-year expansion project that requires an initial fixed asset investment of $2.8 million. The fixed asset will be depreciated straight-line to zero over its four-year tax life, after which time it will have a ..
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