1. Given the folllowing information, calculate the weight average cost of capita
ID: 2725055 • Letter: 1
Question
1. Given the folllowing information, calculate the weight average cost of capital for happy corp.
debt 35%
preffered stock 20
common equity 45
bond cupon rate 11%
bond yield to maturity 9%
divident, expected common $5.00
divident preferred $12.00
price common $60.00
price preffered $106.00
flotation cost, preffered $4.50
growth rate 6%
corporate tax rate 35%
A. 7.91%
B. 8.65%
C. 10.88%
D.12.43%
2. Ps-5 company is considering two investment, both of which cost 10,000. These cash flows are as follows
year project A Project B
1 12,000 10,000
2 8000 6000
3 6000 16,000
Given 10% cost of capital , which project should be taken if you selected only one ? Suppose you apply NPV technique for the capital budgeting?
A. project A B. project B C. no project taken D. not enough information
21. To expand the production capcity you need a new euipment for 16,230. suppose you expect to generate a cash inflow of 2,500 per year for 12 years . what is the internal rate of return and what is your decision if the cost of capital is 10%
A. 11%reject the project
B. 10% reject the project
C. 11% accept the project
D. 10% reject the project
4. which of the following statement is not correct statement?
A. when NPV is positive, the IRR is greater than the cost of capital
b. NPV and IRR methods comes up with the same conclusion for most of the time
c. when IRR is less than the cost of capital , the project is accepted
d. positive NPV implies the cash inflow of the project is greater than the cash outflows of the project
Explanation / Answer
Solution 1:
WEighted average cost of capital = cost of equity * market value equity /Total value + cost of debt * market value debt/Total value + preferred stock * market value /Total
First we need to compute the cost of each elements:
Cost of equity = dividend/Price + g
= 5/ 60 +.06
= 14.33% is the cost of equity
Cost of preferred stock = 12/106-4.5 + .06
= 17.82 is the cost of preferred stock
Cost of debt = 11%*.65 = 7.15%
WACC = .0715*.35 + .1782*.2 + .1433*.45
= .02502 +.0356+.0644
=12.43% is WACC hence option D
solution 2:
Project A NPV:
NPV for project B:
Answer is option B ie the project B should be selected because the NPV of project B is higher than Project A
Solution 21:
PVIFA (12 years , 10%) = 6.8137
2500*6.8137 = 17034
NPV is positive = 17034- 16230 = 804
Hence at 10% the NPV is positive and IRR is the rate of return when the NPV is zero hence 11% the project should be accepted the answer is option C
Solution 4:
Except fot option a & d all the other options are incorrect because the explanation is as follows :
IRR and NPV methods mostly gives two different suggestions
And when the IRR is less than the cost of capital then the projected should not be accepted
Thank you.
Year Cash flow Formula Discount 10% Present value 0 -10000 1 1 -10000 1 12000 1/1.1^1 0.91 10909.09 2 8000 1/1.1^2 0.83 6611.57 3 6000 1/1.1^3 0.75 4507.89 Net present value 12028.55Related Questions
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