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1. A company is planning an expansion that will be financed with the amounts below. Assuming a 40% tax rate what after tax rate of return must the company earn on its investments?
• After tax WACC?
Type of Capital/ Amounts to be raised/ Required return before tax
Bond /756000/ 7.50%
Preferred Stock/ 430000/ 11%
Common Stock/ 656400/ 15%
2. You have been given the following facts and assumptions concerning ABC Corp. at December 31, 2013. Yield to maturity on long term government bond is 5.00%. Yield to maturity on company long term government bond is 7.0%.Coupon rate on company long term bond is 7.0%.Market price of risk is 8.0% along with estimated company beta value of 1.5.Stock is selling for $40 in the market and 250 million shares are outstanding. Assuming that book value of equity is $5240 million along with book value of interest bearing debt of $1250 million. Existing tax rate stands at 35%.Given all the information estimate the ABC Corp's weighted average cost of capital.
6.46% 6.58% 11.27% 15.61%
What is the firm’s weighted average cost of capital (WACC2) if it has to issue new common stock?
What is the revised NPV given that the firm can abandon the project after one year?
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