Risk, Cost of Capital, and Capital Budgeting
5. 生活照片男【Calculating WACC】 Mullineaux Corporation has a target capital structure of 55 percent common stock and 45 percent debt. Its cost of equity is 16 percent, and the cost of debt is 9 percent. The relevant tax rate is 35 percent. What is Mullineaux’s WACC?
11. Finding the WACC Given the following information for Huntington Power Co., find the WACC. Assume the company’s tax rate is 35 percent.
Debt: 4,000 7 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, lling for 103 percent of par; the bonds make miannual payments.
Common stock: 90,000 shares outstanding, lling for $57 per share; the beta is 1.10.
Market: 8 percent market risk premium and 6 percent risk-free rate.
12. 【Finding the WACC】 Titan Mining Corporation has 9 million shares of common stock outstanding and 120,000 8.5 percent miannual bonds outstanding, par value $1,000 eac
h. The common stock currently lls for $34 per share and has a beta of 1.20, and the bonds have 15 years to maturity and ll for 93 percent of par. The market risk premium is 10 percent, T-bills are yielding 5 percent, and Titan Mining’s tax rate is 35 percent.
婴儿长牙顺序
a. What is the firm’s market value capital structure?
b. If Titan Mining is evaluating a new investment project that has the same risk as the firm’s
typical project, what rate should the firm u to discount the project’s cash flows?
13. 【SML and WACC】 An all-equity firm is considering the following projects:
The T-bill rate is 5 percent, and the expected return on the market is 12 percent.
大学就业率a. Which projects have a higher expected return than the firm’s 12 percent cost of capital?
b. Which projects should be accepted?
c. Which projects would be incorrectly accepted or rejected if the firm’s overall cost of capital were ud as a hurdle rate?
16. 【WACC and NPV】 Photochronograph Corporation (PC) manufactures time ries photographic equipment. It is currently at its target debt-equity ratio of 1.3. It’s considering building a new $45 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.7 million in perpetuity. There are three financing options:
1. A new issue of common stock. The required return on the company’s equity is 17 percent.
2. A new issue of 20-year bonds. If the company issues the new bonds at an annual co
upon rate of 9 percent, they will ll at par.
3. Incread u of accounts payable financing. Becau this financing is part of the company’s ongoing daily business, the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .20. (Assume there is no difference between the pretax and aftertax accounts payable cost.)
What is the NPV of the new plant? Assume that PC has a 35 percent tax rate.
Solutions
5. Using the equation to calculate the WACC, we find:
WACC = .60 (.16) + .40(.09)(1 – .35) = .1194 or 11.94%
11. We will begin by finding the market value of each type of financing. We find:
MVD = 4,000($1,000)(1.03) = $4,120,000
MVE = 90,000($57) = $5,130,000
And the total market value of the firm is:
V = $4,120,000 + 5,130,000 = $9,250,000
Now, we can find the cost of equity using the CAPM. The cost of equity is:
RE = .06 + 1.10(.08) = .1480 or 14.80%
The cost of debt is the YTM of the bonds, so:
P最大火山0 = $1,030 = $35(PVIFAR%,40) + $1,000(PVIFR%,40)
R = 3.36%
YTM = 3.36% × 2 = 6.72%
And the aftertax cost of debt is:
RD = (1 – .35)(.0672) = .0437 or 4.37%
Now we have all of the components to calculate the WACC. The WACC is:
WACC = .0437(4.12/9.25) + .1480(5.13/9.25) = .1015 or 10.15%
Notice that we didn’t include the (1 – tC) term in the WACC equation. We simply ud the aftertax cost of debt in the equation, so the term is not needed here.
12. a. We will begin by finding the market value of each type of financing. We find:
MVD = 120,000(元1,000)(0.93) = 元111,600,000
MVE = 9,000,000(元34) = 元306,000,000
And the total market value of the firm is:
V = 元111,600,000 + 306,000,000 = 元417,600,000
So, the market value weights of the company’s financing is:
D/V = 元111,600,000/元417,600,000 = .2672
法律顾问协议 E/V = 元111,600,000/元417,600,000 = .7328
b. For projects equally as risky as the firm itlf, the WACC should be ud as the discount rate.
讶字组词 First we can find the cost of equity using the CAPM. The cost of equity is:
RE = .05 + 1.20(.10) = .1700 or 17.00%
The cost of debt is the YTM of the bonds, so:
P0 = 元930 = 元42.5(PVIFAR%,30句子伤感) + 元1,000(PVIFR%,30)
R = 4.69% 早上好英文
YTM = 4.69% × 2 = 9.38%
And the aftertax cost of debt is:
RD = (1 – .35)(.0938) = .0610 or 6.10%
Now we can calculate the WACC as:
WACC = .1700(.7328) + .0610 (.2672) = .1409 or 14.09%
