2. (18 points) Capital Budgeting (Read carefully before you spend any time on calculations!) Fuel Miser...

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2. (18 points) Capital Budgeting (Read carefully before you spend any time on calculations!) Fuel Miser Rentals Inc. is a car rental company operating throughout Canada. Fuel Miser has 48,000 seven- year semi-annual coupon bonds outstanding. The bonds trade at par and carry an 8% coupon rate. There are 955,000 Fuel Miser shares outstanding, and the most recent price on the Toronto Stock Exchange was $62. Fuel Miser's equity has a beta of 1.05, safe government securities pay 4% interest and the market risk premium is 5.5%. Fuel Miser's serves a budget conscious clientele in big cities and would only rent sub-compacts. Fuel Miser needs to update its aging fleet. After spending $5,000 on a feasibility study, the choice is narrowed down to two cars, both of which would produce the same rental revenue: the Chevy Oreo and the Honda Fat: Chevy Oreo: Initial investment: $15,000 Economic Life: 3 years Operating Expense: $3,500/year Salvage Value: $2,000 Honda Fat: Initial investment: $18,000 Economic Life: 4 years Operating Expense: $3,000/year Salvage Value: $2,900 Management expects that after their useful life is over, the cars will continue to be replaced by virtually identical models. The CCA rate is 30% and the corporate tax rate is 40%. a. Calculate the discount rate that Fuel Miser should use to evaluate the two cars. D = 1,000 48,000 = 48,000,000 E = V = 62 955,000 = 59,210,000 107,210,000 2. (18 points) Capital Budgeting (Read carefully before you spend any time on calculations!) Fuel Miser Rentals Inc. is a car rental company operating throughout Canada. Fuel Miser has 48,000 seven- year semi-annual coupon bonds outstanding. The bonds trade at par and carry an 8% coupon rate. There are 955,000 Fuel Miser shares outstanding, and the most recent price on the Toronto Stock Exchange was $62. Fuel Miser's equity has a beta of 1.05, safe government securities pay 4% interest and the market risk premium is 5.5%. Fuel Miser's serves a budget conscious clientele in big cities and would only rent sub-compacts. Fuel Miser needs to update its aging fleet. After spending $5,000 on a feasibility study, the choice is narrowed down to two cars, both of which would produce the same rental revenue: the Chevy Oreo and the Honda Fat: Chevy Oreo: Initial investment: $15,000 Economic Life: 3 years Operating Expense: $3,500/year Salvage Value: $2,000 Honda Fat: Initial investment: $18,000 Economic Life: 4 years Operating Expense: $3,000/year Salvage Value: $2,900 Management expects that after their useful life is over, the cars will continue to be replaced by virtually identical models. The CCA rate is 30% and the corporate tax rate is 40%. a. Calculate the discount rate that Fuel Miser should use to evaluate the two cars. D = 1,000 48,000 = 48,000,000 E = V = 62 955,000 = 59,210,000 107,210,000