Finance questions

(Cost of debt) XYZ Corp needs to raise $527,000. It has decided to issue a $1000 par value bond with an annual coupon rate of 10.7% with interest paid semiannually and a 15 year maturity. Investors require a rate of return of 8.1%.

a) compute market value of bond

b) how many bonds will they have to issue to raise the needed funds.

c) What is the firms after-tax cost of debt if firms tax rate is 34%(answer-----%)

(Weighted average cost of capital) The target capital structure for QZ Industries is 37% common stock, 12% preferred stock and 51% debt. If the cost of common equity for the firm is 18.5%, the cost of preferred stock is 9.9%, the before tax cost of debt is 7.2% and the firms tax rate is 35%.

What is QZ weighted cost of capital ---------% ( rounded three decimal places)

(Payback and discounted payback period calculation) A firm is considering the following three investment projects. The firm doesn’t want to make any investment that takes more than three years to recover their initial investment.

Year A B C

0 $(950) $(9,000) $5,500)

1 650 4,500 1,500

2 250 3,500 1,500

3 160 3,500 2,500

4 60 3,500 2,500

5 480 3,500 2,500

a) Given company’s 3 year payback period, which of the projects will qualify for acceptance?

b) Rank projects using their payback period. Which looks best and why?

c) If company uses a 9.8% discount rate to analyze projects. What is company’s payback period for each project.

(Calculating project cash flows and NPV) Company is considering the purchase of a new production machine which costs $400,000. The purchase will result in an increase in earnings before interest and taxes of $140,000 per year. Training for workers will cost $26,000 after tax. In addition, it will cost $3,000 after tax to install new machine. Purchase of machine will require an increase in inventory of $24,000. The machine has an expected life of 10 years. Assume simplified straight line depreciation with machine being depreciated down to 0, a 30% marginal tax rate and a required rate of return of 13%.

a) What is initial outlay for this project

b) What are the annual after tax cash flows associated with this project for years 1 through 9

c) What is terminal cash flow in year 10(that is, the annual after tax cash flow in year 10 plus any additional cash flows associated with termination of this project.

d) Should machine be purchased.

(Calculating cash flows-comprehensive problem)A firm in the 30% marginal tax bracket with a required discount rate of 16% is considering a new project. The project is expected to last 5 years then be terminated. Given the following information, determine the net cash flows associated with the project, the projects net present value, the profitability index, and the internal rate of return.

Cost of new plant and equipment $ 7,100,000

Shipping and install costs 110,000

Year Unit Sales

1 $90,000

2 120,000

3 140,000

4 80,000

5 80,000

Sales per unit - $280/unit in years 1-4, $230/unit in year 5

Variable cost per unit-$150/unit

Annual fixed cost-$310,000

Working capital requirement- Initial working capital of $110,000 is required. For each year, the total investment in net working capital will be equal to 11% of the dollar value of the sales for that year. Thus, the investment will increase in years 1through 3, then decrease in year 4. Finally, all working capital is liquidated when project ends at year 5.

Depreciation method- Simplified straight line method over 5 years . Plant and equipment will have no salvage value after 5 years.