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Corporate Finance 320.51 Name________________________ Exam III, Spring 2015 Chapters 10,11 & 13 Answer each question, point values are identified, clearly identify your answer, show your work. 1. XYZ Company has the following balances in its capital accounts as of 12/31/xx: Long Term Debt Preferred Stock Common Stock Paid in Excess Retained Earnings 60,000 21,000 50,000 5,000 15,000 XYZ's Long Term Debt is comprised of 25-year $1,000 face value bonds issued 8 years ago at a 7% coupon rate. The bonds are now selling to yield 10%. Their Preferred Stock is from a single issue of $100 par value, 6%. Preferred stock is now selling to yield investors 8%. XYZ has five thousand shares of common stock outstanding at a market price of $21.25. a) Calculate XYZ's capital structure based on book values: [10 points] (Round to the nearest whole percentage) b) Calculate XYZ's capital structure based on market values: [10 points] (Round to the nearest whole percentage) 1 c) Assume XYZ's retained earnings is 10% and its tax rate is 45%, calculate its WACC using its Book Value based capital structure (ignoring flotation expenses). Round WACC to the nearest whole percentage. [10 points] d) Given the data above, calculate XYZ's WACC using its Market Value based capital structure. Round WACC to the nearest whole percentage. [10 points] 2. XYZ is contemplating a capital project - based on the following information: Cost of New Equipment including installation and freight (assume 5 yr SL)$150,000 Market Research, performed last year $50,000 Projected Units to be Sold (yrs 1-3) 20,000 Projected Units to be Sold (yrs 4-5) 25,000 Price Per Unit (yrs 1-3) $22.00 Price Per Unit (yrs 4-5) $25.00 Cost Ratio (yrs 1-5) 55.0% Incremental cash expenses (yrs 1-5) 125,000 Corporate Tax Rate 45% Corporate Cost of Capital (answered #1 c [BV] or d[MV]) % (round % to the nearest 1%) a. 2 Calculate Initial Cash outlay [5 points] b. Develop the incremental cash flows Years 1-5 points] May use the attached worksheet - Write your answers above 3 [25 3. Based on the above information: a. Calculate the Project's Payback Period [5 points] b. Calculate the Project's NPV [5 points] c. Calculate the Project's IRR (1% range, if necessary) [5 points] d. Calculate the Projects Profitability Index [5 points] May use the attached worksheet - write your answers above 4. XYZ's project information listed above is known as Project A. XYZ is comparing the above results against another project - with the following statistics for Project B: Initial Investment Payback Period NPV IRR Profitability Index $250,000 3.3 years $74,000 12% 1.10x a.Assume the above two projects are Mutually Exclusive. Based on your calculated results - which project would be most beneficial to proceed with? [5 points] 4 b.Assume the above two projects are each Stand Alone - If XYZ has a Capital Budget of $550,000, and IRR guideline of 12% and a Payback Policy of 3 years - which project(s) best fits their policy/guidelines and should be funded given their capital budget? [5 points] 5