Reference no: EM132935290

Questions -

Q1- Gudjohnsen Incorporated is considering an investment that costs $62,500 and returns net cash flows of $12,000 per year for ten years. Its expected salvage value of $4,500 after the tenth year will equal the book value. Gudjohnsen has a debt ratio of 30%, a cost of debt of 6.5% and a cost of equity of 14%.

a) What is the investment's WACC?

b) Should Gudjohnsen accept the investment?

Q2- The Zenden Corporation is evaluating the purchase of a machine. The new machine would cost $225,000 and be depreciated for tax purposes by the straight-line method over a 7-year life to a salvage value of $15,000. In each year of the machine's life, Zenden Corp. would save $60,000. At the end of its life, the machine could be sold for its accounting salvage value of $15,000. Zenden's tax rate (federal plus state) is 35%, and it has a 12% WACC. What is the net present value of this capital budgeting project?

Q3- Parlour Corporation has a target capital structure of 35% bond financing, 25% preferred stock financing, and 40% common equity financing. The cost of bonds is 9%, the cost of preferred stock is 11%, the cost of retained earnings is 14%, and the cost of a new issue of common stock is 15%. Parlour forecasts it will retain $3,750,000 of new earnings in the coming year.

a) What is Parlour's weighted-average cost of capital (WACC) when it uses retained earnings as its source of common equity financing?

b) Where is the break in Parlour's cost of capital schedule.

c) What is Parlour's weighted-average cost of capital (WACC) after it switches to new common stock as its source of common equity financing?