1. DoubleD Inc.s currently outstanding 11% coupon bonds have a yield to maturity of 8%. DoubleD believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is Double Ds after tax cost of debt?

2. Stephens Pharmaceuticals can issue perpetual preferred stock at a price of $50 per share with an annual dividend of $4.50 per share. Ignoring flotation costs what is the companys cost of preferred stock?

3. Johnsons Robotics common stock is currently trading for $36 a share. The stock is expected to pay a dividend of $3.00 per share at the end of the year and the dividend is expected to grow at a constant rate of 5.0% per year. What is the cost of common equity?

4. Davids Digital Devices has a beta of 0.8. The yield on the 3 month T-Bill is 4% and the yield on the 10 year T-Bond is 6%. The market risk premium is 5.5%, and the average return on the stock market was 15% last year. What is the estimated cost of common equity using the CAPM?

5. Shi Importers balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in common equity. Shis tax rate is 40%. The interest rate Shi pays on its debt is 6%. The cost of preferred stock is 5.8% and the cost of common equity is 12%.

a. What is the companys WACC?

b. The company has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock. What is the companies target WACC?

6. A project has an initial cost of $40,000, expected net cash flows of $9,000 per year for 7 years, and a cost of capital of 11%

a. What is the projects NPV?

b. What is the projects IRR?

c. What is the projects PB?

d. What is the projects DPB?

7. Your division is considering two investment projects, each of which requires an upfront expenditure of $15 million. You estimate that the investments will produce the following cash flows:

Year Project A Project B

1 $5,000,000 $20,000,000

2 10,000,000 10,000,000

3 20,000,000 6,000 000

a. What is the net present value of the two projects if the cost of capital is 5%, 10%, 15%?

b. What are the two projects IRRs at the same costs of capital?

8. Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system in this years capital budget. The projects are independent. The cash outlay for the truck is $17,100 and for the pulley system it is $22,430. The firms cost of capital is 14%. After tax cash flows are as follows:

Year Truck Pulley

1 $5,100 $7,500

2 $5,100 $7,500 3 $5,100 $7,500 4 $5,100 $7,500

5 $5,100 $7,500

Calculate the NPV, IRR, PB, DPB for each project. Indicate the correct accept or reject decision for each project.

9. Davis Industries must choose between a gas powered or an electric powered forklift truck for moving materials in its factory. The electric powered truck will cost more, but it will be less expensive to operate; it will cost $22,000 whereas the gas powered will cost $17,500. The cost of capital is 12%. The life of both trucks is expected to be six years. The net cash inflows for the electric powered truck will be $6,290 per year and those for the gas powered truck will be $5,000 per year. Calculate the NPV, IRR, PB, DPB for each type of truck and decide which to recommend.

10. After discovering a gold vein in the Colorado Mountains, CTC Mining Corporation must decide to go ahead and develop the deposit. The most cost effective method of mining gold is the sulfuric acid extraction, a process that could result in environmental damage.

To begin mining CTC must spend $900,000 for new mining equipment and pay $165,000 for its installation. The mining operation will net the firm an estimated $350,000 per year and the vein is expected to last for five years. CTCs cost of capital is 14%. Assume that the cash flows occur at the end of each year.

a. What is the projects NPV, IRR, & PB?

b. Should the project be undertaken if environmental impacts where not a consideration?

c. How should environmental effects be considered when evaluating this or any other project? How might these concepts affect the decision to invest?