The Sunland Company has an after-tax cost of debt capital of 4 percent, a cost of preferred stock of 7 percent, a cost of equity capitalof 10 percent, and a weighted average cost of capital of 6 percent. Sunland intends to maintain its current capital structure as it raisesadditional capital. In making its capital-budgeting decisions for the average-risk project, the relevant cost of capital is:O 6 percent.10 percent.7 percent.O 4 percent.

To determine the relevant cost of capital for an average-risk project, Sunland Company should use…

Answered: The Sunland Company has an after-tax…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 5P

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Aaron Athletics is trying to determine its optimal capital structure. The company’s capital structure consists of debt and common equity. In order to estimate the cost of capital at various debt levels the company has constructed the following table: Percent financed with debt (wD) Percent financed with equity (ws) Before tax cost of debt 0.10 0.90 7.0% 0.20 0.80 7.2% 0.30 0.70 8.0% 0.40 0.60 8.8% 0.50 0.50 9.6% The company uses the CAPM to estimate its cost of equity, rS . The risk-free rate is 4% and the market risk premium is 5%. Aaron estimates that if it had no debt its beta would be 1.0. (It’s unlevered beta equals 1.0). The company’s tax rate is 40%. On the basis of this information, what is the company’s optimal capital structure, and what is the WACC at that capital structure? (Show your calculations at each debt level).
(question3 c,d) c) Calculate the profitability index (PI) for each project d) Calculate the internal rate of return (IRR) for each project.
You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze six proposed capital investments. Each project has a cost of $1,000, and the required rate of return for each is 12%, determine for each project (a) the payback period, (b) the net present value, (c) the profitability index, and (d) the internal rate of return. Assume under MACRS the asset falls in the three-year property class and that the corporate tax rate is 25 percent. You are limited to a maximum expenditure of $3000 only for this capital budgeting period. Which projects you will accept and why? Justify your suggestions Project A Project B Project C Project D Project E Project F Investment -1000 -1000 -1000 -1000 -1000 -1000 1 150 200 250 800 900 1000 2 350 300 250 350 300 200 3 400 500 600 200 150 100 4 700 650 600 200 150 50 12 Capital Budgeting and Estimating Cash Flows Table 12.2 PROPERTY CLASS RECOVERY YEAR MACRS depreciation percentages 3-YEAR 5-YEAR 7-YEAR 10-YEAR…
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Mogul Company uses a 12% discount rate in making capital budgeting decisions. Mogul is considering a project that has a net present value of $75,000. What is the project's internal rate of return? O Less than 12% O Equal to 12% O Less than or equal to 12% O Greater than 12% O None of the above
Brown and Company
A company wants to decide which project to undertake out of two projects A and B. For this purpose, it wants to evaluate each project that have the same initial investment (cost) but different cash flows for the next three years. The following table gives information on these two projects. The discount rate to be used is 8 percent, which is the WACC for the company. Use two methods of capital budgeting: The Net Present Value (NPV) Method and the Internal Rate of Return (IRR) Method, to evaluate and compare the two projects. Based on the outcome of calculations, choose the best project A or B and explain your decision for each method. Show all your work for each method step by step. Initial Investment and Cash Flows of Projects A and B in AED Project A Project B Initial Investment - 150,000 - 150,000 Year 1 Cash flow 20,000 50,000 Year 2 Cash flow 90,000 90,000 Year 3 Cash flow 70,000 60,000
MResorts has a current capital structure that is 70% equity, 20% debt, and 10% preferred This is considered optimal. MResorts is considering a $35 million capital budgeting project. MResorts has estimated the following: After-tax cost of debt: 9% Cost of preferred stock: 10% Cost of equity: 13.0% What should cost of capital be for this project? A. 8.7% B. 9.6% C. 11.9% D. 10.13%
Harris Company must set its investment and dividend policies for the coming year. It has three independent projects from which to choose, each of which requires a $5 million investment. These projects have different levels of risk, and therefore different costs of capital. Their projected IRRs and costs of capital are as follows: Project A: Cost of capital = 17%; IRR = 19% Project B: Cost of capital = 13%; IRR = 9% Project C: Cost of capital = 9%; IRR = 8% Harris intends to maintain its 40% debt and 60% common equity capital structure, and its net income is expected to be $5,750,000. If Harris maintains its residual dividend policy (with all distributions in the form of dividends), what will its payout ratio be? Round your answer to two decimal places.
The Emu Manufacturing Company is considering five independent investment opportunities. The required investment outlays and expected internal rates of return (IRR) for these investments are shown below. The firm's cost of capital is 14% and its target optimal capital structure is a debt ratio of 30%. Internally generated funds totalling $900,000 are available for all investment opportunities. (i) Based on the IRR method, which investment(s) should be accepted? (ii) If the company were to undertake all acceptable investments, what amount should be paid out in dividends according to the residual dividend policy? (iii) What would be the amount of external finance required if the company were to undertake all acceptable investments?
Seduak has estimated the costs of debt and equity capital for various proportions of debt in its capital structure. % Debt After-tax cost of debt Cost of equity 0% - 13.0% 10 5.4% 13.3 20 5.4 13.8 30 5.8 14.4 40 6.3 15.2 50 7.0 16.0 60 8.2 17.0 Based on these estimates, determine Seduak’s optimal capital structure
E Over-the-Top Canopies (OTC) is evaluating two independent investments. Project S costs $170,000 and has an IRR equal to 9 percent, and Project L costs $160,000 and has an IRR equal to 7 percent. OTC's capital structure consists of 20 percent debt and 80 percent common equity, and its component costs of capital are rat = 4%, rs = 11%, and re = 14.5%. If OTC expects to generate $260,000 in retained earnings this year, which project(s) should be purchased? Round your answers to one decimal place. Project S L eBook Thus, -Select- WACC % % Acceptable? -Select- ✓ -Select- should be purchased. Grade it Now Save & Continue Continue without saving

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