Finance Assignment 1

P 2. Andyco Inc has the following balance sheet an equity market-to -book ratio of 1.5. Assuming the market value of debt equals its book value, what weights should it use for its WACC calculation?

Assets	Liabilities and equity
1000	Debt	400
	Equity	600

P3. Book Co. has one million shares of common equity with a par(book) value of $1 and retained earnings of $30 millions, and its shares have a market value of $50 per share. It also has debt with a par value of $20 million that is trading at 101% of par.

1. What is the market value of its equity?
2. What is the market value of its debt?
3. What weights should it use in computing its WACC?

P5. Aluminum maker Alcoa has a beta of about 2.0, whereas Hormel Foods has a beta of 0.45. If the expected excess return of the market portfolio is 5%, which of these firm has a higher equity cost of capital, and how much higher is it?

P6. Avicorp has a $10 million debt issue outstanding, with a 6% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 95% of par value.

1. What is Avicorp’s pre tax cost pf debt(expressed as an EAR)?
2. If Avicorp faces a 40% tax rate, what is its after tax cost of debt?

P8. Dewyco has preferred stock trading at $50 per share. The next preferred dividend of $4 is due in one year. What is Dewyco’s cost of capital for preferred stock?

P11. HighGrowth company has a stock price of $20. The firm pay a dividend next year of $1, and its dividend is expected to grow at a rate of 4% per year thereafter. What is your estimate of HighGrowth’s cost of equity capital?

P15. AllCity Inc. is financed 40% with debt, 10% with preferred stock and 50% with common stock. Its pre-tax cost of debt is 6%, its preferred stock pays an annual dividend of $2.50 and is priced at $30. It has an equity beta of 1.1. Assume the risk-free rate is 2% the market risk premium is 7% and AllCity’s tax rate is 35%. What is its after tax WACC?

P16. Pfd Company has debt with a yield to maturity of 7%, a cost of equity of 13%, and a cost of preferred stock of 9%. The market value of its debt, preferred stock, and equity are $10 million, $3 million, and $15 million, respectively, and its tax rate is 40%. What is this firm’s WACC?

P18. A retail coffee company is planning to open 100 new coffee outlets that are expected to generate, in total $15 million in free cash flows per year, with a growth rate of 3% in perpetuity. If the coffee company’s WACC is 10% and the cost of the expansion is $200million, what is the NPV of this expansion?

P20. RiverRocks ( see Problem 19), whose WACC is 12% is considering an acquisition of Raft Adventures( whose WACC is 15%). What is the appropriate discount rate for RiverRocks to use to evaluate the acquisition? Why?

RiverRocks Inc. is considering a project with the following projected free cash flows.

0	1	2	3	4
-50	10	20	20	15

P21. RiverRocks’ Purchase of Raft Adventures will cost $100 million but will generate cash flows that start at $15 million in one year and then grow at 4% per year forever. What is the NPV of the acquisition?

P 23. CoffeeStop primarily sells coffee. It recently introduced a premium coffee -flavoured liquor. Suppose the firm faces a tax rate of 35% and collects the following information:

	Beta	Equity %	Debt %
CoffeeStop	0.61	96%	4%
Brown-FormanLiquors0.61	0.26	89%	11%

P25. RiverRocks realizes that it will have to raise the financing for the acquisition of Raft Adventure ( described in Problem20 and 21) by issuing new debt and equity. RiverRocks estimates that the direct issuing costs will amount to $7 million. How should it account for these costs in evaluating the project? Should RiverRocks go ahead with the project?