Problem #1 (15 marks) Felix Furniture has the following semiannual interest payments. If the corporate tax rate is 35 % , what is the after-tax cost of the company's debt? two bond issues outstanding, each making Coupon Rate Price Quote Bond Maturity 5 years 15 years Face Value 1 6.00% 103.20 $450,000 500,000 2 6.80% 97.25 Problem #2 (5 marks) The expected market return is 12 % , and T-bills are transportation has a beta of 1.2. The company's next dividend is expected to be $2 per share, and dividends have been growing at an annual rate of 1.3 %. If the stock sells for $25 per share, what is the average of the company's cost of equity? currently yielding 2%. Thompson Problem #3 (16 marks) Below is the balance sheet (book value) for JP Products Inc. (JPP). The preferred stock currently sells for $15 per share and the common stock for $20 per share. There are 1,000 common shares and 100 preferred shares outstanding. Bonds are currently selling for $935.80. Assets Cash & short term securities Liabilities and Owners Equity $10,000 Bonds, coupon 8% , paid semi-annually (maturity 10 years) Preferred stock (par value $20 per share) $1,000 Accounts Receivable 2,000 3,000 10,000 10,000 7,000 Common Stock Inventories Retained earnings Plant & equipment 21,000 $32.000 Preferred shares pay a 7.5 % dividend. The beta of the common stock is 1.5, the market risk premium is 7 % , and the risk free rate is 4%. The company's tax rate is $32,000 Total Total 40% a) What is the JPP's cost of debt? (6 marks) b) What is JPPP's cost of preferred shares? (2 marks) c) What is JPP's cost of common equity? (2 marks) d) What are the capital structure (weights) of JPP based on market values? (4 marks) e) What is JPP's weighted average cost of capital? (2 marks) 100 % 3 4 Problem#4 (18 marks): As part of your new been asked to help evaluate a new project. Lachute has a market value debt-to-equity ratio of .6667. The firm's cost of equity is 15 % and its pre-tax cost of debt is 4.917 %. Flotation costs of debt and equity are 1.71 % and 5 % , respectively. The firm has a tax rate of 40%. as an analyst for Lachute Lumber, you have job responsibilities project requires purchasing equipment that will cost $2,000,000 plus The new additional $200,000 in shipping & installation costs and $50,000 in training costs. Management estimates that the firm will generate annual operating revenues before taxes of $1,000,000 and incur annual operating expenses before taxes of $500,000 over the economic life of the project. The economic life of the machine is ten years and management estimates that at the end of the economic life, the machine will have a salvage value of $200,000. This machine is in asset class 8 which has a CCA rate of 20%. The asset class is expected to remain open at the end of the project. Assume this project will have the same level of risk as the firm, flotation costs are expensed and the company has no internally generated funds available. al What is Lachute's weighted average cost of capital? (4 marks) b) Calculate the Initial Investment. (5 marks) c) Calculate the PV of Operating (Incremental) cash flows after tax (3 marks) d) Calculate the PV of the ending cash flows (2 mark) e) Calculate the PV of the CCA tax shield (2 marks) f Calculate the NPV. Should the project be accepted? (2 marks) an