#1. (10pts) Estimating the WACC: ABC Corp has a m arket capitalization of $120 m

Question

#1. (10pts) Estimating the WACC: ABC Corp has a m arket capitalization of $120 million, and $30 million in outstanding debt. The firm's equity beta is 1.2, risk free rate is 3%, and market risk premium is 4%. The yield on firm's outstanding debt is 5%. what is ABC Corp's WACC after tax? Assume tax rate is 40% and use two equations which are in lecture slides. Show your work. #2. (10pts) XYZ Manufacturing Company is evaluating two forklift systems to use in its plant that produces the towers for a windmill power farm. The costs and cash flows from these systems are shown below. If the company uses a 10% discount rate (cost of capital) for all projects, determine which forklift system should be purchased (Solve the question using a mathematical equation, financial calculator or excel): Show your work 1) 2) Using Net Present Value (NPV) rule (5 pts) Using Internal Rate of Return (IRR) rule (5 pts) Year 0 -$3,400 -$4,200 Year 1 990 870 Year 2 1,360 1,770 Year 3 2,200 2,860 Otis Forklifts Craigmore Forklifts

Explanation / Answer

Otis Forklifts:

CF0 = -3.400

CF1 = 990

CF2 = 1,360

CF3 = 2,200

IRR

3,400 = 990/ (1 + r) + 1,360/ (1 + r)2 + 2,200/ (1 + r)3

r = 14%

NPV:

NPV = - 3,400 + 990/ (1 + 10%) + 1,360/ (1 + 10%)2 + 2,200/ (1 + 10%)3

NPV = - 3,400 + 900 + 1,123.97 + 1,165.89

NPV = 276.86

Craugmore Forklifts

CF0 = -4,200

CF1 = 870

CF2 = 1,770

CF3 = 2,860

IRR

4,200 = 870/ (1 + r) + 1,770/ (1 + r)2 + 2,860/ (1 + r)3

r = 12.27%

NPV = - 4,200 + 870/ (1 + 10%) + 1,770/ (1 + 10%)2 + 2,860/ (1 + 10%)3

NPV = - 4200 + 790.91 + 1,462.81 + 2,148.76

NPV = 202.48

Using NPV rule we will choose Otis Forflifts

Using IRR rule we will also choose Otis Forflifts

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