Note that you have to show your calculation steps to get full credits. If you need to use the financial calculator, the Excel spreadsheet, or the present value table to obtain the solution, then

(1) If you use the financial calculator, show the detailed steps led to the solution. (2) If you use the Excel spreadsheet, attach the spreadsheet of your work which clearly shows how you

arrive at the solution. (3) If you use the present value table, show the detailed work led to the solution.

Name:___________________________ CWID:_____________________________

Please read the information below very carefully as it will be used to solve all of the questions below.

Roberto Inc. is a manufacturing company. The company has always followed their ideal capital structure which the management insists is 40% debt and 60% equity capital. The company can issue bonds for 9% coupon rate with 22 years to maturity. The interest is paid semi-annually. The bonds can be issued with a price of $835.42 today. Roberto's marginal tax rate is 40%. For cost of equity, the company uses the CAPM based on SML. The risk-free rate in the market is 8% and the market rate of return is 14%. The company has a beta of 1.1. Roberto is experiencing a highly abnormal growth rate of 30%. This growth rate is expected to continue for four years. After year four, the growth rate is expected to return to a normal 8% and remain constant afterwards for the foreseeable future. Roberto just paid a dividend of $1.15. Furthermore, Roberto is evaluating several projects to invest in. The top project that is being considered will cost $1,000,000 and promises to pay $500,000 in year one, $400,000 in year two, $300,000 in year three and $100,000 in year four. This project will cease to exist with no salvage value at end of year four. So, the cash flow would look like the following:

Year CF ($ in 000's) 0 -1,000 (Initial Outlay) 1 500 2 400 3 300 4 100

Based on the information provided above, answer the following questions:

1. What is Roberto's cost of debt before taxes?

a. 11% b. 12% c. 10% d. 8% Please Show Your Calculation; see the instruction given at the beginning of the assignment.

2. What is Roberto's after-tax cost of debt?

a. 6.6% b. 7.2% c. 6% d. 4.8% Please Show Your Calculation; see the instruction given at the beginning of the assignment.

3. What is the company's cost of equity capital using the CAPM?

a. 9.6% b. 8% c. 14.6% d. 12.09% Please Show Your Calculation; see the instruction given at the beginning of the assignment.

4. What is weighted average cost of capital (WACC) for Roberto Inc?

a. 10.02% b. 11.40% c. 12.86% d. 14% Please Show Your Calculation; see the instruction given at the beginning of the assignment.

5. Using the information related to paid dividend, cost of equity and growth outlook for Roberto Inc., what

should be the price for this supernormal growth stock today (P0)?

a. $25.32 b. $33.42 c. $39.21 d. $37.53 Please Show Your Calculation; see the instruction given at the beginning of the assignment.

6. Using the cash-flows related to the top project Roberto is considering and the WACC you previously

calculated, what is the expected NPV for the project (in 000's)?

a. $78.82 b. $109.45 c. $49.18 d. $53.09 Please Show Your Calculation; see the instruction given at the beginning of the assignment.

7. Further evaluating the top project for Roberto, what is the anticipated IRR for the project?

a. 11.8% b. 14.49% c. 12.45% d. 13.02% Please Show Your Calculation ; see the instruction given at the beginning of the assignment.