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Grading Rubric

Assignment: Module 8 Problems
Content and Development 41 Points Possible	Points Possible	Points Earned	Comments
Problem 1 Chapter 17	9
Problem 5 Chapter 17	12
Problem 1 Chapter 18	10
Problem 9 Chapter 18	10
Readability and Style 5 Points Possible	Points Possible	Points Earned	Comments
Work Shown	5
Mechanics 4 Points Possible	Points Possible	Points Earned	Comments
Rules of grammar, usage and punctuation are followed.	2
Spelling is correct.	2
Total Points	50	0

Grade		0.0%	Comments:
Comments:

&"Arial,Bold"AT&&T Proprietary (Internal Use Only)&"Arial,Regular" Not for use or disclosure outside the AT&&T companies except under written agreement

Chapter 17 Problems

Prob 17-1	Find the NPV and PI of a project that costs $1,500 and returns $800 in year one and $850 in year two. Assume the project’s cost of
	capital is 8 percent.
	PV of cash inflows
	PV of cash outflows
	NPV
	PI
Prob 17-5	5. For the following projects, compute NPV, IRR, MIRR, profitability index, and payback. If these projects are mutually exclusive, which
	one(s) should be done? If they are independent, which one(s) should be undertaken?
	A	B	C	D
Year 0	($1,000)	($1,500)	($500)	($2,000)
Year 1	$ 400	$ 500	$ 100	$ 600
Year 2	$ 400	$ 500	$ 300	$ 800
Year 3	$ 400	$ 700	$ 250	$ 200
Year 4	$ 400	$ 200	$ 200	$ 300
Discount Rate	10%	12%	15%	8%
NPV
PI
IRR
MIRR
Payback
Which chosen if
mutually exclusive?
Which chosen if
independent?

Chapter 18 Problems

Prob 18-1	AQ&Q has EBIT of $2 million, total assets of $10 million, stockholders’ equity of $4 million, and pretax interest expense of 10
	percent.
	a. What is AQ&Q’s indifference level of EBIT?
	Indifference level of EBIT
	b. Given its current situation, might it benefit from increasing or decreasing its use of debt?
	Current EBIT
	Explain.
	c. Suppose we are told AQ&Q’s average tax rate is 40 percent.
	How does this affect your answers to (a) and (b)?
Prob 18-9	The following are balance sheets for the Genatron Manufacturing Corporation for the years 2010 and 2011:
	BALANCE SHEET	2010	2011
	Cash	$ 50,000	$ 40,000
	Accounts receivable	$ 200,000	$ 260,000
	Inventory	$ 450,000	$ 500,000
	Total current assets	$ 700,000	$ 800,000
	Fixed assets (net)	$ 300,000	$ 400,000
	Total assets	$ 1,000,000	$ 1,200,000
	Bank loan, 10%	$ 90,000	$ 90,000
	Accounts payable	$ 130,000	$ 170,000
	Accruals	$ 50,000	$ 70,000
	Total current liabilities	$ 270,000	$ 330,000
	Long-term debt, 12%	$ 300,000	$ 400,000
	Common stock, $10 par	$ 300,000	$ 300,000
	Capital surplus	$ 50,000	$ 50,000
	Retained earnings	$ 80,000	$ 120,000
	Total liabilities and equity	$ 1,000,000	$ 1,200,000
	a. Calculate the weighted average cost of capital based on book value weights. Assume an after-tax cost of new debt of 8.63
	percent and a cost of common equity of 16.5 percent.
	WACC
	b. The current market value of Genatron’s long-term debt is $350,000. The common stock price is $20 per share and there
	are 30,000 shares outstanding. Calculate the WACC using market value weights and the component capital costs in (a).
	Total equity
	wd
	we
	WACC
	c. Recalculate the WACC based on both book value and market value weights assuming that the before-tax cost of debt will be
	18 percent, the company is in the 40 percent income tax bracket, and the after-tax cost of common equity capital is 21 percent.
	kd
	ke
	Book value WACC
	Market value WACC