The projects that yield a return higher than the cost of capital of the firm Introduction: The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity .

Question

Assume a firm has earnings before depreciation and taxes of $200,000 and no depreciation. It is in a 25 percent tax bracket. a. Compute its cash flow using the following format: Earnings before depreciation and taxes _____Depreciation _____Earnings before taxes _____Taxes @ 25% _____Earnings after taxes _____Depreciation _____Cash Flow _____ b. Compute the cash flow for the company if depreciation is $200,000. Earnings before depreciation and taxes _____Depreciation _____Earnings before taxes _____Taxes @ 25% _____Earnings after taxes _____Depreciation _____Cash Flow _____ c. How large a cash flow benefit did the depreciation provide?

Answer 1

Question

Chapter 12, Problem 17QP

a)

Summary Introduction

To determine: The projects that yield a return higher than the cost of capital of the firm

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

b)

Summary Introduction

To determine: The projects that the firm should accept

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

c)

Summary Introduction

To determine: The projects that the firm would incorrectly reject or incorrectly accept if it used the cost of capital as the parameter to evaluate the projects

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

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Assume a firm has earnings before depreciation and taxes of $200,000 and no depreciation. It is in a 25 percent tax bracket. a. Compute its cash flow using the following format: Earnings before depreciation and taxes _____Depreciation _____Earnings before taxes _____Taxes @ 25% _____Earnings after taxes _____Depreciation _____Cash Flow _____ b. Compute the cash flow for the company if depreciation is $200,000. Earnings before depreciation and taxes _____Depreciation _____Earnings before taxes _____Taxes @ 25% _____Earnings after taxes _____Depreciation _____Cash Flow _____ c. How large a cash flow benefit did the depreciation provide?

Assume a $40,000 investment and the following cash flows for two alternatives. Year Investment X Investment Y 1 $6,000 $15,000 2 8,000 20,000 3 9,000 10,000 4 17,000 — 5 20,000 — Which of the alternatives would you select under the payback method?

The Short-Line Railroad is considering a $140,000 investment in either of two companies. The cashflows are as follows:Year Electric Co. Water Works1.................. $85,000 $30,0002.................. 25,000 25,0003.................. 30,000 85,0004–10............ 10,000 10,000a. Using the payback method, what will the decision be?b. Using the Net Present Value method, which is the better project? The discount rate is 10%.

Answer 2

Question

Chapter 12, Problem 17QP

a)

Summary Introduction

To determine: The projects that yield a return higher than the cost of capital of the firm

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

b)

Summary Introduction

To determine: The projects that the firm should accept

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

c)

Summary Introduction

To determine: The projects that the firm would incorrectly reject or incorrectly accept if it used the cost of capital as the parameter to evaluate the projects

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

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Answer 3

Question

Chapter 12, Problem 17QP

a)

Summary Introduction

To determine: The projects that yield a return higher than the cost of capital of the firm

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

b)

Summary Introduction

To determine: The projects that the firm should accept

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

c)

Summary Introduction

To determine: The projects that the firm would incorrectly reject or incorrectly accept if it used the cost of capital as the parameter to evaluate the projects

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

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Answer 4

Question

Chapter 12, Problem 17QP

a)

Summary Introduction

To determine: The projects that yield a return higher than the cost of capital of the firm

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

b)

Summary Introduction

To determine: The projects that the firm should accept

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

c)

Summary Introduction

To determine: The projects that the firm would incorrectly reject or incorrectly accept if it used the cost of capital as the parameter to evaluate the projects

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

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Answer 5

Chapter 12, Problem 17QP

a)

Summary Introduction

To determine: The projects that yield a return higher than the cost of capital of the firm

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

b)

Summary Introduction

To determine: The projects that the firm should accept

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

c)

Summary Introduction

To determine: The projects that the firm would incorrectly reject or incorrectly accept if it used the cost of capital as the parameter to evaluate the projects

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

Answer 6

Chapter 12, Problem 17QP

a)

Summary Introduction

To determine: The projects that yield a return higher than the cost of capital of the firm

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

Answer 7

Chapter 12, Problem 17QP

a)

Summary Introduction

To determine: The projects that yield a return higher than the cost of capital of the firm

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

Answer 8

b)

Summary Introduction

To determine: The projects that the firm should accept

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

Answer 9

b)

Summary Introduction

To determine: The projects that the firm should accept

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

Answer 10

c)

Summary Introduction

To determine: The projects that the firm would incorrectly reject or incorrectly accept if it used the cost of capital as the parameter to evaluate the projects

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

Answer 11

c)

Summary Introduction

To determine: The projects that the firm would incorrectly reject or incorrectly accept if it used the cost of capital as the parameter to evaluate the projects

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

Answer 12

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Ch. 12.1 - What is the primary determinant of the cost of...Ch. 12.1 - What is the relationship between the required...Ch. 12.2 - Prob. 12.2ACQ Ch. 12.2 - Prob. 12.2BCQ Ch. 12.3 - Prob. 12.3ACQ Ch. 12.3 - Prob. 12.3BCQ Ch. 12.3 - Prob. 12.3CCQ Ch. 12.4 - Prob. 12.4ACQ Ch. 12.4 - Why do we multiply the cost of debt by (1 TC)...Ch. 12.4 - Under what conditions is it correct to use the...

The projects that yield a return higher than the cost of capital of the firm Introduction: The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity .

To determine: The projects that yield a return higher than the cost of capital of the firm Introduction: The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

To determine: The projects that the firm should accept Introduction: The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

Chapter 12 Solutions

To determine: The projects that yield a return higher than the cost of capital of the firm

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.

To determine: The projects that the firm should accept

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity.