Question 3: NPV and EVA Assume Project X costs $860,000 initially and will generate cash flows in perpetuity of $320,000. The firm's cost of capital is 12%. a. Calculate the project's NPV. b. Calculate the annual EVA in a typical year. c. Calculate the overall project EVA and compare to your answer in part a. Question 4: Bar charts and risk Swan's Sportswear is thinking about bringing out a line of designer jeans. Currently, it is negotiating with two well-known designers. Because of the highly competitive nature of the industry, the two lines of jeans have been given code names. After market research, the firm has established the expectations shown in the following table about the annual rates of return Market Probability Annual rate of return Acceptance Line J Line K Very poor 0.05 7.5% 1% Poor 0.15 12.5% 2.5% Average 0.60 8.5% 8% Good 0.15 14.75% 13.5% Excellent 0.05 16.25% 15% Use the table to: a. Construct a bar chart for each line's annual rate of return. b. Calculate the expected return for each line. c. Evaluate the relative riskiness for each jeans line's rate of return using the bar charts. Question 1: Finding the weighted average cost of capital (WACC) and marginal cost of capital The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan's current capital structure calls for 50 percent debt, 30 percent preferred stock, and 20 percent common equity. Initially, common equity will be in the form of retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt, 9.6 percent; preferred stock, 9 percent; retained earnings, 10 percent; and new common stock, 11.2 percent. a. b. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, Ke.) If the firm has $18 million in retained earnings, at what size capital structure will the firm run out of retained earnings? Question 2: NPV and IRR The Hudson Corporation makes an investment of $24,000 that provides the following cash flow: Year Cash Flow 1. $13,000 2. 13,000 3.... 4,000 . Calculate the NPV of the project if the cost of capital is 8%. b. Calculate the NPV of the project if the cost of capital is 10%. C. Use the NPVs you have calculated to estimate the IRR of the project d. Recommend on financial grounds alone whether the project should go ahead.