Need done by Friday afternoon

11-1 Cost of Equity Diddy Corp. stock has a beta of 1.2, the current risk-free rate is 5 percent, and the expected return on the market is 13.5 percent. What is Diddy’s cost of equity?

11-4 Cost of Debt KatyDid Clothes has a $150 million (face value) 30-year bond issue selling for 104 percent of par that carries a coupon rate of 11 percent, paid semiannually. What would be Katydid’s before-tax component cost of debt?

11-8 Cost of Preferred Stock Marme, Inc., has preferred stock selling for 96 percent of par that pays an 11 percent annual coupon. What would be Marme’s component cost of preferred stock?

11-16 WACC Suppose that JB Cos. has a capital structure of 78 percent equity, 22 percent debt, and that its before-tax cost of debt is 11 percent while its cost of equity is 15 percent. If the appropriate weighted-average tax rate is 21 percent and JB estimates that they can make full use of the interest tax shield, what will be JB’s WACC?

11-18 WACC Suppose that MNINK Industries’ capital structure features 63 percent equity, 7 percent preferred stock, and 30 percent debt. If the before-tax component costs of equity, preferred stock, and debt are 11.60 percent, 9.5 percent, and 9 percent, respectively, what is MNINK’s WACC if the firm faces an average tax rate of 21 percent and can make full use of the interest tax shield?

11-22 WACC Weights WhackAmOle has 2 million shares of common stock outstanding, 1.5 million shares of preferred stock outstanding, and 50,000 bonds. If the common shares are selling for $63 per share, the preferred shares are selling for $52 per share, and the bonds are selling for 103 percent of par, what would be the weights used in the calculation of WhackAmOle’s WACC?

11-26 Firmwide versus Project-Specific WACCs An all-equity firm is considering the projects shown below. The T-bill rate is 4 percent and the market risk premium is 7 percent. If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s), if any, will be incorrectly accepted?

Project Expected Return Beta

A 8.0% 0.5

B 19.0 1.2

C 13.0 1.4

D 17.0 1.6

11-28 Divisional WACCs Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.9, 1.1, 1.3, and 1.5, respectively. If all current and future projects will be financed with 25 percent debt and 75 percent equity, and if the current cost of equity (based on an average firm beta of 1.2 and a current risk-free rate of 4 percent) is 12 percent and the after-tax yield on the company’s bonds is 9 percent, what will the WACCs be for each division?

13-2 NPV with Normal Cash Flows Compute the NPV statistic for Project Y and indicate whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent.

Project Y

Time: 0 1 2 3 4

Cash flow −$8,000 $3,350 $4,180 $1,520 $300

13-4 NPV with Non-Normal Cash Flows Compute the NPV statistic for Project K and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 6 percent.

Project K

Time: 0 1 2 3 4 5

Cash flow −$10,000 $5,000 $6,000 $6,000 $5,000 −$10,000

13-8 Discounted Payback Compute the discounted payback statistic for Project D and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent and the maximum allowable discounted payback is four years.

Project D

Time: 0 1 2 3 4 5

Cash flow −$11,000 $3,350 $4,180 $1,520 $300 $1,000

13-10 IRR Compute the IRR statistic for Project F and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent.

Project F

Time: 0 1 2 3 4

Cash flow −$11,000 $3,350 $4,180 $1,520 $2,000

13-12 MIRR Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent.

Project J

Time: 0 1 2 3 4 5

Cash flow −$1,000 $350 $1,480 −$520 $300 −$100

For problem 13-29 identify the IRRs for A and B, as well as the crossover point. 

13-29 NPV Profiles Graph the NPV profiles for both projects on a common chart, making sure that you identify all of the “crucial” points.

13-32 Multiple IRRs Construct an NPV profile and determine EXACTLY how many non-negative IRRs you can find for the following set of cash flows:

Time: 0 1 2 3 4 5 6 7

Cash flow −$150 $275 $150 −$100 $300 −$300 $200 −$300

integrated mini-case Project Valuation

 For the integrated mini-case, calculate the payback period, discounted payback period, NPV, IRR, MIRR, and PI.

Suppose your firm is considering investing in a project with the accompanying cash flows, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively.

Time: 0 1 2 3 4 5

Cash flow −$175,000 −$65,800 $94,000 $41,000 $122,000 $81,200