Chapter 10

1. Percy Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to maturity on the companys outstanding bonds is 9%, and its tax rate is 40%. Percys CFO estimates that the companys WACC is 9.96%. What is Percys cost of common equity?

2. Patton Paints Corporation has a target capital structure of 40% debt and 60% common equity, with no preferred stock. Its before-tax cost of debt is 10%, and its marginal tax rate is 40%. The current stock price is P₀ = $30.00. The last dividend was D₀ = $3.00, and it is expected to grow at an 8% constant rate. What is its cost of common equity and its WACC?

3. Firm A has flowing financial information:

Tax rate = 40%.

10-year, 10% coupon, semiannual payment bonds, par value is $1,000, sell for $1,150.

Preferred stock sells for $111.10, annual dividend payment is $8.

Beta = 1.5; risk-free rate = 5%; market risk premium = 4%.

Target capital structure: 30% debt, 10% preferred, 60% common equity.

Calculate firm As WACC.

Chapter 11

1. Your division is considering two projects with the following cash flows (in millions):

	0	1	2	3
Project A	-$25	$5	$10	$17
Project B	-$20	$10	$9	$6

a. What are the projects NPVs assuming the WACC is 5%? 10%? 15%?

b. If the WACC was 5% and A and B were mutually exclusive, which project would you choose? What if the WACC was 10%? 15%?

2. A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:

	0	1	2
Project S	-$15	$12	$8
Project L	-$15	$8	$12

What is the IRR of the two projects?

3. Your division is considering two projects, and the projects after-tax cash flows (in millions of dollars) would be as follows:

	0	1	2	3	4
Project A	-$30	$5	$10	$15	$20
Project B	-$30	$20	$10	$8	$6

Which project looks better when judged by the paybacks?