Finance problems solving
Faisal07
financeh.w.docxPROBLEM 1 (4 points)
Given the below adjusted closing stock prices for a firm, find arithmetic average annual rate
of return, geometric average rate of return, variance and standard deviation of returns.
Show your work!
YEAR ADJUSTED CLOSING PRICE
2010 $40
2011 28
2012 35
2013 40
2014 45
PROBLEM 2 (3 point)
A firm’s common stock has a beta of 1.3. Risk-free rate is equal to 1% and expected return
on the market is equal to 6%. Cost of debt before taxes is equal to 8%. Tax rate is 35%. If the
firm is financed with twice as much debt as equity, find its WACC. Show your work!
PROBLEM 3 (12 points)
XYZ Inc’s common stock is currently selling on the market for $85 per share. There are
100’000 shares outstanding. The firm has just paid a dividend of $2. Analysts project that
XYZ will grow at a rate of 4% per year. The firm also has outstanding debt with total
combined face value of $45’000’000, which is selling today for 90% of its face value, has an
annual coupon interest rate of 5% and time to maturity of 15 years. Tax rate is equal to 25%.
Required:
1) Find the required rate of return for XYZ’s equity. Show your work!
2) Find XYZ’s cost of debt before taxes. Show your work!
3) Find the proportion of equity financing. Show your work!
4) Find the after-tax cost of debt. Show your work!
5) Find the proportion of debt financing. Show your work!
6) Find the firm’s WACC. Show your work!
PROBLEM 4 (14 points)
XYZ Inc is considering investing in a new hydraulic press. The press will cost $130’000, has a
useful life of 7 years, $30’000 salvage value and will be depreciated using the straight-line
method. This project has a life of 3 years. At the end of the 3rd year, the press will be sold at
an estimated value of $60’000. XYZ’s WACC is equal to 10% and tax rate is equal to 35%. Net
working capital requirements for this project are $15’000, represent a necessary increase in
spare parts inventory and will be constant throughout project’s life. This inventory of spare
parts will be depleted by the end of year 3. If purchased, the hydraulic press will help
increase cash revenue by $20’000 annually while increasing operating expenses by $2’000 at
the same time.
Required:
1) Compute operating cash flow for years 1, 2 and 3. Show your work!
2) Compute cash flow due to change in fixed assets for years 0 and 3. Show your work!
3) Compute cash flow due to change in NWC in years 0 and 3. Show your work!
4) Compute free cash flow for years 0, 1, 2, and 3. Show your work!
PROBLEM 1 (4 points)
Given the below adjusted closing stock prices for a firm, find arithmetic average annual rate
of return, geometric average rat
e of return, variance and standard deviation of returns.
Show your work!
YEAR
ADJUSTED CLOSING PRICE
2010
$40
2011
28
2012
35
2013
40
2014
45
PROBLEM 2 (3 point)
A firm’s common stock has a beta of 1.3. Risk
-
free rate is equal to 1% and expected return
on
the market is equal to 6%. Cost of debt before taxes is equal to 8%. Tax rate is 35%. If the
firm is financed with twice as much debt as equity, find its WACC. Show your work!
PROBLEM 3 (12 points)
XYZ Inc’s common stock is currently selling on the market for $85 per share. There are
100’000 shares outstanding. The firm has just paid a dividend of $2. Analysts project that
XYZ will grow at a rate of 4% per year. The firm also has outstanding debt wit
h total
combined face value of $45’000’000, which is selling today for 90% of its face value, has an
annual coupon interest rate of 5% and time to maturity of 15 years. Tax rate is equal to 25%.
Required:
1) Find the required rate of return for XYZ’s equit
y. Show your work!
2) Find XYZ’s cost of debt before taxes. Show your work!
3) Find the proportion of equity financing. Show your work!
4) Find the after
-
tax cost of debt. Show your work!
5) Find the proportion of debt financing. Show your work!
6) Find th
e firm’s WACC. Show your work!
PROBLEM 4 (14 points)
XYZ Inc is considering investing in a new hydraulic press. The press will cost $130’000, has a
useful life of 7 years, $30’000 salvage value and will be depreciated using the straight
-
line
method. This
project has a life of 3 years. At the end of the 3rd year, the press will be sold at
PROBLEM 1 (4 points)
Given the below adjusted closing stock prices for a firm, find arithmetic average annual rate
of return, geometric average rate of return, variance and standard deviation of returns.
Show your work!
YEAR ADJUSTED CLOSING PRICE
2010 $40
2011 28
2012 35
2013 40
2014 45
PROBLEM 2 (3 point)
A firm’s common stock has a beta of 1.3. Risk-free rate is equal to 1% and expected return
on the market is equal to 6%. Cost of debt before taxes is equal to 8%. Tax rate is 35%. If the
firm is financed with twice as much debt as equity, find its WACC. Show your work!
PROBLEM 3 (12 points)
XYZ Inc’s common stock is currently selling on the market for $85 per share. There are
100’000 shares outstanding. The firm has just paid a dividend of $2. Analysts project that
XYZ will grow at a rate of 4% per year. The firm also has outstanding debt with total
combined face value of $45’000’000, which is selling today for 90% of its face value, has an
annual coupon interest rate of 5% and time to maturity of 15 years. Tax rate is equal to 25%.
Required:
1) Find the required rate of return for XYZ’s equity. Show your work!
2) Find XYZ’s cost of debt before taxes. Show your work!
3) Find the proportion of equity financing. Show your work!
4) Find the after-tax cost of debt. Show your work!
5) Find the proportion of debt financing. Show your work!
6) Find the firm’s WACC. Show your work!
PROBLEM 4 (14 points)
XYZ Inc is considering investing in a new hydraulic press. The press will cost $130’000, has a
useful life of 7 years, $30’000 salvage value and will be depreciated using the straight-line
method. This project has a life of 3 years. At the end of the 3rd year, the press will be sold at
