Reference no: EM132978915

Problem 1:

Compute the cost of capital for the firm for the following:

1. A bond the has a $1.000 par value (face value) and a contract or coupon interest rate of 11%. The bond has a current market value of $1.125 and will mature in 10 years. The firm´s marginal tax rate is 34%.
2. A new common stock issue that pays a $1.8 dividend last year. The firm´s dividends are expected to continue to grw at 7% per year forever. The price of the firm´s common stock is now $27.5.
3. A preferred stock paying a 9% dividend on a $100 par value.
4. A bond selling to yield 12% where the firm´s tax rate is 34%

Problem 2:

1-Explain what is the difference between the Payback Period and Discounted Payback Period

Problem 3:

MM has recently approached about the prospect of purchasing a large construction crane. The crane rents for $500 an hour but operator, fuel, insurance and miscellaneous expenses run $200 an hour when the crane is in use. The company owner estimates it will cost $1.000 a month to store and maintain the crane and the annual depreciation expense is $50.000.

1. Calculate the accounting break-even number of annual rental hours needed to produce zero operating earnings from the crane (before taxes).
2. Calculate the cash break-even point. If we ignore non-cash expenses such as depreciation in the break-even calculation, how many hours must the crane be rented in order to break even on aa cash basis?
3. Why do we have two different break-even points? What does each one tell you?

Problem 4:

WW.Inc is considering the purchase of a new production machine for $200.000. The purchase of this machine will result in an increase in earnings before interest and taxes of $50.000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $5.000 after taxes. In addition, it would cost $5.000 after tax to install this machine correctly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $20.000. This machine has an expected life of 10 years, after which it will have no salvage value. Finally, to purchase the new machine, it appears that the firm would have to borrow $100.000 at 8% interest from it local bank, resulting in additional interest payment of $8.000 per year. Assume simplified straight-lin depreciation, that this machine is being depreciated down to zero, a3 4% tax rate, and a required rate of return of 10%.

1. What is the initial outlay associated with this project?
2. What are the annual after-tax cash flows associated with this project for year 1 through 9?
3. What is the terminal cash flow in year 10 (that is, the annual after-tax cash flow in year 10 plus any additional cash flow associated with termination of the project)?
4. Should this machine be purchased?, find the project NPV