Question 1

Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 12%.

	0		1		2		3		4
Project A	-1,150		650		320		270		390
Project B	-1,150		250		255		420		840

What is Project As IRR? Do not round intermediate calculations. Round your answer to two decimal places.

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Review the IRR equation. The solution for IRR is a percentage rate not a dollar value. The IRR calculation is not dependent on the firm's WACC. Don't forget the minus sign for the Year 0 cash flow. Don't forget to include the Year 0 cash flow in your calculation.

What is Project B's IRR? Do not round intermediate calculations. Round your answer to two decimal places.

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Question 2

Quantitative Problem: Barton Industries can issue perpetual preferred stock at a price of $57 per share. The stock would pay a constant annual dividend of $2.65 per share. If the firm's marginal tax rate is 25%, what is the company's cost of preferred stock? Round your answer to two decimal places.

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Question 3

Quantitative Problem: Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, D₁, to be $1.80 and it expects dividends to grow at a constant rate g = 3.0%. The firm's current common stock price, P₀, is $20.00. The current risk-free rate, r_RF, = 4.3%; the market risk premium, RP_M, = 5.8%, and the firm's stock has a current beta, b, = 1.30. Assume that the firm's cost of debt, r_d, is 9.36%. The firm uses a 2.8% risk premium when arriving at a ballpark estimate of its cost of equity using the bond-yield-plus-risk-premium approach. What is the firm's cost of equity using each of these three approaches? Round your answers to two decimal places.

CAPM cost of equity:	%
Bond yield plus risk premium:	%
DCF cost of equity:	%

Question 4

Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 7%.

	0		1		2		3		4
Project A	-1,150		650		375		240		290
Project B	-1,150		250		310		390		740

What is Project A's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

%

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Review the MIRR equation.

The solution for MIRR is a percentage rate not a dollar value.

Review the NPV equation definition.

Don't discount the Year 0 cash flow since its PV is simply -1,150.

The MIRR calculation is dependent on the firm's WACC.

What is Project B's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

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Question 5

uantitative Problem: Barton Industries expects next year's annual dividend, D₁, to be $2.40 and it expects dividends to grow at a constant rate g = 4.6%. The firm's current common stock price, P₀, is $20.00. If it needs to issue new common stock, the firm will encounter a 4.2% flotation cost, F. What is the flotation cost adjustment that must be added to its cost of retained earnings? Do not round intermediate calculations. Round your answer to two decimal places.

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What is the cost of new common equity considering the estimate made from the three estimation methodologies? Do not round intermediate calculations. Round your answer to two decimal places.

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Question 6

Palencia Paints Corporation has a target capital structure of 30% debt and 70% common equity, with no preferred stock. Its before-tax cost of debt is 10%, and its marginal tax rate is 25%. The current stock price is P₀ = $20.00. The last dividend was D₀ = $2.00, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC? Do not round intermediate calculations. Round your answers to two decimal places.

r_s = %

WACC = %

Questiion 7

Olsen Outfitters Inc. believes that its optimal capital structure consists of 70% common equity and 30% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $4 million of retained earnings with a cost of r_s = 11%. New common stock in an amount up to $8 million would have a cost of r_e = 13.0%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of r_d = 11% and an additional $3 million of debt at r_d = 15%. The CFO estimates that a proposed expansion would require an investment of $10.0 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.

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Question 8

Project L requires an initial outlay at t = 0 of $45,000, its expected cash inflows are $15,000 per year for 9 years, and its WACC is 12%. What is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

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Question 9

Project L requires an initial outlay at t = 0 of $74,726, its expected cash inflows are $11,000 per year for 11 years, and its WACC is 9%. What is the project's IRR? Round your answer to two decimal places.

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Question 10

Project L requires an initial outlay at t = 0 of $60,000, its expected cash inflows are $13,000 per year for 9 years, and its WACC is 12%. What is the project's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

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