3.

a. b. c. d. e.

ABC Corporation is considering an investment of $1,800,000 with expected after-tax cash inflows of $320 000 for seven years and an additional after-tax salvage value of $90,000 in Year 7. Use ABC Corporations cost of capital from the previous problem (point e) in your capital budgeting decisions.

WhatistheinvestmentsNPV?

What is the investments IRR? Answer: ____

What is the investments MIRR? Answer: ____

What is the investments profitability index? Answer: ____ Whatistheinvestmentspaybackperiod? Answer: ____

f. What is the appropriate investment decision based on the five criteria? Why?

3.

a. b. c. d. e.

ABC Corporation is considering an investment of $1,800,000 with expected after-tax cash inflows of $320 000 for seven years and an additional after-tax salvage value of $90,000 in Year 7. Use ABC Corporations cost of capital from the previous problem (point e) in your capital budgeting decisions.

WhatistheinvestmentsNPV?

What is the investments IRR? Answer: ____

What is the investments MIRR? Answer: ____

What is the investments profitability index? Answer: ____ Whatistheinvestmentspaybackperiod? Answer: ____

f. What is the appropriate investment decision based on the five criteria? Why? Answer: ____

2. An analyst has gathered the following information about ABC Corporation and the market: The company has a debt-to-equity ratio of 0.6 that reflects its target capital structure Beta for the common stock is 1.5

The risk-free rate of return is 3.8%

The expected market risk premium is 5.3%

Current market price per share of common stock is $109

Current dividend per share of common stock is $5.25

The expected constant dividend growth rate is 4.5%

The flotation costs for issuing new common stock are 3% of proceeds

The company has decided to issue $1,000 face value bonds with an 11% coupon paid quarterly and a 7-year maturity at $990 per bond.

ABC Corporation has a tax rate of 40%

a. What weights should you use in the weighted average cost of capital calculations for ABC

Corporation?

Answer: ____

b. What is ABCs cost of equity using the CAPM approach?

Answer: ____

c. What is ABCs cost of new equity using the dividend discount model approach (with flotation

costs)?

Answer: ____

d. What is ABCs after-tax cost of debt?

Answer: ____

Commented [SCM1]: 8 point

Commented [SCM2]: 1 point Commented [SCM3]: 2 points

Commented [SCM4]: 2 points Commented [SCM5]: 2 points

e. Using the CAPM approach for the cost of equity, what is ABCs weighted average cost of capital? Answer: ____

f. ABC Corporation can buy a piece of equipment that is anticipated to provide a 9% return and can be financed with debt. Additionally, the company can buy a new machine that would yield a 16% return and can be financed through common equity. Assuming ABCs capital structure, cost of debt and cost of new equity, which project(s) new machine and/or piece of equipment should be accepted?

Answer: ____________