Question
Problem 1 LaFinistra Corporation plans to invest in one of the new projects, and the cost of that project is $ 272,250.00, with the following
Problem 1
LaFinistra Corporation plans to invest in one of the new projects, and the cost of that project is $272,250.00, with the following information, summarized in the Table below. This project is considered by the Corporation of low risk; therefore, the Corporation uses a WACC of 10.21% for this project.
Year | Cash Flow (all figures are in $) | Expected Abandonment Cashflow (all figures are in $) |
0 | (272,250.00) | 0 |
1 | 131,313.46 | 231,111.90 |
2 | 102,336.66 | 164,654.35 |
3 | 66,054.51 | 120,934.35 |
4 | 51,662.81 | 39,992.90 |
5 | 35,116.29 | - |
Required: After how many years should LaFinistra Corporation abandon the project? Make sure to show your work and explain your approach in writing in a few lines.
Problem 2
The financial manager of LaTavola Corporation plans to estimate the weighted average cost of capital for the Corporation. Following are balance sheets and some information about LaTavola Corporation:
Assets
Current assets $38,000,000
Net plant, property, and equipment $123,000,000
Total Assets $161,000,000
Liabilities and Equity
Accounts payable $32,000,000
Accruals $9,000,000
Current liabilities $41,000,000
Long term debt (40,000 bonds, $1,000 face value) $40,000,000
Total liabilities $81,000,000
Common Stock 10,000,000 shares) $30,000,000
Retained Earnings $50,000,000
Total shareholders equity $80,000,000
Total liabilities and shareholders equity $161,000,000
LaTavola stock is currently selling for $9.67 per share, and LaTavola Corporation bonds are selling for 96.95% of the par of $1,000 per bond. These bonds have a 7.25 percent annual coupon rate, with semi-annual payments. The bonds mature in eighteen years. The beta for LaTavola Corporation is approximately equal to 1.45.
The yield on a 25-year Treasury bond is 5.60 percent. The average return on the market portfolio is 11.55%. LaTavola Corporation. is in the 22 percent tax bracket. What is the estimate of LaTavolas WACC?
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