Finance Assignment 1 P 2. Andyco Inc has the following balance sheet an equity market-to -book ratio
Question:
Finance Assignment 1
P 2. Andyco Inc has the following balance sheet an equity market-to -book ratio of 1.5. Assuming the market value of debt equals its book value, what weights should it use for its WACC calculation?
Assets | Liabilities and equity | |
1000 | Debt | 400 |
Equity | 600 |
P3. Book Co. has one million shares of common equity with a par(book) value of $1 and retained earnings of $30 millions, and its shares have a market value of $50 per share. It also has debt with a par value of $20 million that is trading at 101% of par.
- What is the market value of its equity?
- What is the market value of its debt?
- What weights should it use in computing its WACC?
P5. Aluminum maker Alcoa has a beta of about 2.0, whereas Hormel Foods has a beta of 0.45. If the expected excess return of the market portfolio is 5%, which of these firm has a higher equity cost of capital, and how much higher is it?
P6. Avicorp has a $10 million debt issue outstanding, with a 6% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 95% of par value.
- What is Avicorp’s pre tax cost pf debt(expressed as an EAR)?
- If Avicorp faces a 40% tax rate, what is its after tax cost of debt?
P8. Dewyco has preferred stock trading at $50 per share. The next preferred dividend of $4 is due in one year. What is Dewyco’s cost of capital for preferred stock?
P11. HighGrowth company has a stock price of $20. The firm pay a dividend next year of $1, and its dividend is expected to grow at a rate of 4% per year thereafter. What is your estimate of HighGrowth’s cost of equity capital?
P15. AllCity Inc. is financed 40% with debt, 10% with preferred stock and 50% with common stock. Its pre-tax cost of debt is 6%, its preferred stock pays an annual dividend of $2.50 and is priced at $30. It has an equity beta of 1.1. Assume the risk-free rate is 2% the market risk premium is 7% and AllCity’s tax rate is 35%. What is its after tax WACC?
P16. Pfd Company has debt with a yield to maturity of 7%, a cost of equity of 13%, and a cost of preferred stock of 9%. The market value of its debt, preferred stock, and equity are $10 million, $3 million, and $15 million, respectively, and its tax rate is 40%. What is this firm’s WACC?
P18. A retail coffee company is planning to open 100 new coffee outlets that are expected to generate, in total $15 million in free cash flows per year, with a growth rate of 3% in perpetuity. If the coffee company’s WACC is 10% and the cost of the expansion is $200million, what is the NPV of this expansion?
P20. RiverRocks ( see Problem 19), whose WACC is 12% is considering an acquisition of Raft Adventures( whose WACC is 15%). What is the appropriate discount rate for RiverRocks to use to evaluate the acquisition? Why?
RiverRocks Inc. is considering a project with the following projected free cash flows.
0 | 1 | 2 | 3 | 4 |
-50 | 10 | 20 | 20 | 15 |
P21. RiverRocks’ Purchase of Raft Adventures will cost $100 million but will generate cash flows that start at $15 million in one year and then grow at 4% per year forever. What is the NPV of the acquisition?
P 23. CoffeeStop primarily sells coffee. It recently introduced a premium coffee -flavoured liquor. Suppose the firm faces a tax rate of 35% and collects the following information:
Beta | Equity % | Debt % | |
CoffeeStop | 0.61 | 96% | 4% |
Brown-FormanLiquors0.61 | 0.26 | 89% | 11% |
P25. RiverRocks realizes that it will have to raise the financing for the acquisition of Raft Adventure ( described in Problem20 and 21) by issuing new debt and equity. RiverRocks estimates that the direct issuing costs will amount to $7 million. How should it account for these costs in evaluating the project? Should RiverRocks go ahead with the project?