Allam’s Corporation had the following figures in 2019: -Interest rate on loan debt is 14% -Tax Rate is 20% -Total liabilities are 2,000,000 -Total assets are 5,000,000 -Risk-free rate of return is 15% -Beta for the company is 1.2 -Average Market return is 25% The company is evaluating two projects; S & N that are expected to generate the following: Year S N 0 (500,000) (500,000) 1 240,000 170,000 2 230,000 200,000 3 190,000 250,000 4 140,000 290,000 Required: Calculate the Weighted Average Cost of Capital Using payback, discounted payback, and net present value techniques, which project would you recommend, if any?
Allam’s Corporation had the following figures in 2019: -Interest rate on loan debt is 14% -Tax Rate is 20% -Total liabilities are 2,000,000 -Total assets are 5,000,000 -Risk-free rate of return is 15% -Beta for the company is 1.2 -Average Market return is 25% The company is evaluating two projects; S & N that are expected to generate the following: Year S N 0 (500,000) (500,000) 1 240,000 170,000 2 230,000 200,000 3 190,000 250,000 4 140,000 290,000 Required: Calculate the Weighted Average Cost of Capital Using payback, discounted payback, and net present value techniques, which project would you recommend, if any?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
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Allam’s Corporation had the following figures in 2019:
-Interest rate on loan debt is 14%
-Tax Rate is 20%
-Total liabilities are 2,000,000
-Total assets are 5,000,000
-Risk-free
-Beta for the company is 1.2
-Average Market return is 25%
The company is evaluating two projects; S & N that are expected to generate the following:
|
Year |
S |
N |
|
0 |
(500,000) |
(500,000) |
|
1 |
240,000 |
170,000 |
|
2 |
230,000 |
200,000 |
|
3 |
190,000 |
250,000 |
|
4 |
140,000 |
290,000 |
Required:
- Calculate the Weighted Average Cost of Capital
- Using payback, discounted payback, and
net present value techniques, which project would you recommend, if any?
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