Bridget Degnan

Question 1

A law firm would like to retain a lawyer for an upfront payment of $50,000. In return, for the next year the firm would like to have access to 8 hours of her time every month. The lawyers rate is $550 per hour and her opportunity cost of capital is 15% per year.

What does the IRR rule advise regarding this opportunity?

What about the NPV rule?

Question 2

Rumolt Motors has 30 million shares outstanding with a price of $15 per share. In addition, Rumolt has issued bonds with a total current market value of $150 million. Suppose Rumolts equity cost of capital is 10%, and its debt cost of capital is 5%.

What is Rumolts pretax WACC?

If Rumolts corporate tax rate is 35%, what is its after-tax WACC?