Problem 2: ABC has hired you as their CFO. Your job is to determine what their W

Question

Problem 2: ABC has hired you as their CFO. Your job is to determine what their WACC is based on the following information: 1) the value of common stock outstanding is $900,000. The cost of equity is 14.99% 2) the value of bonds outstanding is $400,000. The YTM on these bonds is 7.98% 3) the corporate tax rate is 32%.
Problem 3: PART A: Jack's company receives a fixed payment of $5000 per year from a project. That project will last for eight years. What is the present value of the cash stream, if the interest rate is 6%? Problem 3:PART B: Jill's company is interested in biding on one of two projects.She would like to compare them based on their future value. Project X provides a cash flow of $9000 for six years.Project Y provides a cash flow of $12000 for six years. Project X 's annual rate of return is 12% Project Y 's annual rate of return is 9% Which project has the highest future value in year six? Problem 2: ABC has hired you as their CFO. Your job is to determine what their WACC is based on the following information: 1) the value of common stock outstanding is $900,000. The cost of equity is 14.99% 2) the value of bonds outstanding is $400,000. The YTM on these bonds is 7.98% 3) the corporate tax rate is 32%.
Problem 3: PART A: Jack's company receives a fixed payment of $5000 per year from a project. That project will last for eight years. What is the present value of the cash stream, if the interest rate is 6%? Problem 3:PART B: Jill's company is interested in biding on one of two projects.She would like to compare them based on their future value. Project X provides a cash flow of $9000 for six years.Project Y provides a cash flow of $12000 for six years. Project X 's annual rate of return is 12% Project Y 's annual rate of return is 9% Which project has the highest future value in year six?

Explanation / Answer

The WACC is as follows Debt .3077 (4/13) * .0543 (.0798*.68(after tax))= .0167 Equity .6923 (9/13) * .1499 .1038 WACC = .0167+.1038= .1205 Looking at an annuity present value table the factor for 8 years at 6% is 6.21 so 5000*6.21=31,050. Looking at an annuity future value table we have the future value for 6 years at 12% is 8.1152 and 6 years at 9% is 7.5233. So 9,000* 8.1152= 73,037, and 12,000* 7.5233= 90,280 so the latter is superior.

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