Capital Budgeting homework
1. ABC Company has $10,000,000 of par value bonds outstanding with a market price of $1,050 per bond and a yield to maturity of 6.00%. The beta of the stock is 1.25 while Treasury securities are yielding 4.00%. ABC Company has 1,000,000 shares of stock outstanding with a book value of $10 per share and a market value of $12.00 per share. ABC’s risk premium is 7.20%. ABC has determined that its WACC is 8.07%. What is ABC’s tax rate? 2. XYZ Company has $10,000,000 par value bonds outstanding with a coupon rate of 5.00%, 10 years to maturity, and currently trading at a premium. The cost of equity is 11.00% and XYZ has a capital structure of 60 percent debt and 40 percent equity. XYZ has a tax rate of 40%. Is the WACC greater than or less than 6.20%? 3. XYZ is contemplating the purchase of new equipment with a 3 year useful life and that will be depreciated using the MACRS. The cost of the equipment is $250,000 with set-up costs of $25,000. Revenues are expected to increase by $125,000 per year. The equipment will have zero salvage value at the end of three years. XYZ’s tax rate is 40% and its WACC is 6.50%. What is the NPV of the equipment? 4. Find the NPV for the following piece of equipment: Expected cash flows are $75,000 for the first 3 years, then $50,000 for the next two years and $7,500 in the final year. The cost of the equipment is $200,000 plus $10,000 of installation costs. In addition, the equipment will be housed in a partially empty warehouse with allocated overhead costs of $15,000, of which $5,000 is for occupancy space. The cost of capital is 7.00%.