Your portfolio has a beta of 1.36. The portfolio consists of 14 percent U.S. Tre

ID: 2740465 • Letter: Y

Question

Your portfolio has a beta of 1.36. The portfolio consists of 14 percent U.S. Treasury bills, 24 percent stock A, and 62 percent stock B. Stock A has a risk level equivalent to that of the overall market. What is the beta of stock B?

1.52

0.55

0.88

1.81

5.67

Sixx AM Manufacturing has a target debtequity ratio of 0.65. Its cost of equity is 16 percent, and its cost of debt is 5 percent. If the tax rate is 34 percent, what is the company’s WACC? (Round your answer to 2 decimal places. (e.g., 32.16))

You are given the following information for Lightning Power Co. Assume the company’s tax rate is 40 percent.

8,000 6.3 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 106 percent of par; the bonds make semiannual payments.

13,000 shares of 3 percent preferred stock outstanding, currently selling for $73 per share.

What is the company's WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

An investment project has annual cash inflows of $4,600, $3,700, $4,900, and $4,100, and a discount rate of 13 percent.

What is the discounted payback period for these cash flows if the initial cost is $5,500? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What is the discounted payback period for these cash flows if the initial cost is $7,600? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What is the discounted payback period for these cash flows if the initial cost is $10,600? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

WACC

Explanation / Answer

Answer 1.

Let Beta of Stock B be x.

24%*1.36 + 62%*x = 1.36

X = 1.68

Answer 2.

By Using Debt Equity ratio, WACC can be calculated as

WACC = 0.16(1/1.65) + 0.05(.65/1.65)(1 – 0.34)

WACC = 0.097 + 0.013 = 0.11 = 11%

Answer 3

Debt – 8,000 pays 6.3%, or 504,000 less 40% on a market value.

Net cost 504,000 (1-0.40) /8,000,000 = 3.78%

Common Stock - Per CAPM: R = R(f) + Beta (Risk premium market)

R = 4.3% + 1.09 (10%) = 15.20%

Preferred - 13,000 shares at 100 par, or 1,300,000 pays 3%, or 39,000 on market value of 949,000.

Cost of preferred stock = 39,000/949,000 = 4.11%

WACC -
Debt of 8 million costs 3.78%, or 302,400
Common at market value of 18,550,000 costs 15.20%, or 2,819,600
Preferred at 949,000 costs 4.11%, or 39,000
Total cost 3,161,000 on total Capital of 27,499,000 = 11.50%

Answer 4.

Year

Cash Flow

Discount Cash Flow

Year 1

4,600

0.8850

4,071

Year 2

3,700

0.7831

2,897.47

Year 3

4,900

0.6931

3,396.19

Year 4

4,100

0.6133

5,214.53

Discounted Payback Period if investment is $5,500 is 1.49 (1 + 1429/2,897.47)years.

Discounted Payback Period if investment is $7,600 is 2.19 (2 + 631.53/3,396.19) years.

Discounted Payback Period if investment is $10,600 is 3.05 (3 + 235.34/5,214.53) years