Reference no: EM131981184
Question 1
Examine the following book-value balance sheet for Harvard University Products, Inc. The preferred stock currently sells for $15 per share and the common stock for $20 per share. There are one million common shares outstanding.
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Book Value Balance Sheet ($ millions)
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Assets
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Liabilities and Net Worth
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Cash and shotuterm securities
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$ 1
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BumIs. coupon - 8%, paid annually ()natality - 10 years,
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currenty laid to maturity - 9%)
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$10
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Accounts receivable
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3
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Preferred snx1.- (par value 120 per share)
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2
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Inventories
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7
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Common stock
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10
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Plant and equipment
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21
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Retained earnings
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10
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bat
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$32
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Total
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$32
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Required
A) What is the capital structure of the firm based on market values? (8 marks)
B) Assume the preferred stock pays a dividend of $2 per share, the beta of the common stock is 1.5, the market risk premium is 7 percent, the risk-free rate is 4 percent, and the firm's tax rate is 40 percent. What is Harvard University's weighted-average cost of capital? (5 marks)
C) Harvard University Products is evaluating a new venture into home computer systems. The internal rate of return on the new venture is estimated at 13.4 percent. WACCs of firms in the personal computer industry tend to average around 14 percent. Should the new project be pursued?
What assumptions must be valid to make discounting the cash flows from the proposed venture at Harvard University Products' WACC the correct decision? On the other hand, what assumptions must be valid to making discounting the cash flows from the proposed venture at the average WACC of firms in the personal computer industry the correct decision? (7 marks)
Question 2: Hill Country Snack Foods - Handout (30 marks) Required
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