Reference no: EM132021500

1. A firm is analyzing two machines to determine which one it should purchase. The company requires a rate of return of 14% and uses straight-line depreciation to a zero book value over the life of its equipment. Machine A has a cost of $744,205, annual operating costs of $34,200, and a four-year life. Machine B costs $798,000, has annual operating costs of $21,500, and has a four-year life. Whichever machine is purchased will be replaced at the end of its useful life. The firm should purchase Machine ________ because it lowers the firm's annual costs by approximately ________ as compared to the other machine.

a. B; $17,404

b. A; $16,791

c. A; $17,404

d. B; $17,521

e. B; $16,791

2. A firm has 75,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 7.50% (market rate). The company also has 750,000 shares of 6% preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $64 per share. The common stock has a beta of 1.21 and sells for $44 per share. The U.S. Treasury bill is yielding 2.30% (market rate) and the return on the market is 11.20%. The corporate tax rate is 34%. What is the firm's weighted average cost of capital?

a. 10.64%

b. 9.69%

c. 11.56%

d. 11.30%

e. 11.18%