Reference no: EM131360513

Q1. Lunch counter is expanding and expects operating cash flows of $26,000 a year for 4 years as a result. This expansion requires $39,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $3,000 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return on 16 percent?

Q2. Ding has an unlevered cost of capital of 13 percent, a cost of debt of 7.8 percent, and a tax rate of 32 percent. What is the target debt-equity ratio if the targeted cost of equity is 15.51 percent?

Q3. Dang has an overall beta of 0.64 and a cost of equity of 11.2 percent for the firm overall. The firm is 100 percent financed with common stock. Division A within the firm has an estimated beta of 1.08 and is the riskiest of all of the firm's operations. What is an appropriate cost of capital for division A if the market risk premium is 9.5 percent?

Q4. Dong has expected earnings before interest and taxes of $14,600, an unlevered cost of capital of 15 percent, and a tax rate of 35 percent. The company also has $3,500 of debt that carries a 6 percent coupon. The debt is selling at par value. What is the value of this firm?

Q5. Morning foods has expected earnings before interest and taxes of $48,000, an unlevered cost of capital of 13.2 percent, and debt with both a book and face value of $25,000. The debt has an 8.5 percent coupon. The tax rate is 34 percent. What is the value of the firm?

Q6. Which of the following should be included in the analysis of a new product? You should provide your explanations about why you include or exclude or all of them.

a. money already spent for research and development of the new product

b. reduction in sales for a current product once the new product is introduced

c. increase in accounts receivable needed to finance sales of the new product

d. market value of a machine owned by the firm which will be used to produce the new product.

Q7. Because NPV analysis is based on estimated numbers of future cash flows and cost of capital, forecasting risk does matter. Explain what tools you can use to consider and handle this issue.

Q8. Explain what is meant by business risk and financial risk using MM capital structure theory.

Q9. Explain how the slpoe of the security market line is determined and why every stock that is correctly priced, according to CAPM, will lie on this line.

Q10. What role does the weighted average cost of capital play when determining a project's cost of capital? You should answer this question by differentiating company WACC from project WACC.