Taylor s has a beta of .78 and a debt-to-equity ratio of .2. The market rate of return is 10.6 percent, the tax rate is 34 percent, and the risk-free rate is 1.4 percent. The pretax cost of debt is 6.1 percent. What is the firm's WACC?

8.08%

7.67%

8.16%

9.96%

7.82%

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2) Mullineaux Corporation has a target capital structure of 75 percent common stock and 25 percent debt. Its cost of equity is 15 percent, and the cost of debt is 6 percent. The relevant tax rate is 30 percent. What is Mullineaux's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) WACC % rev: 11_02_2016_QC_CS-68342, 04_27_201 3) Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a fiveyear project. The company bought some land three years ago for $4.4 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $5.2 million. In five years, the aftertax value of the land will be $5.6 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $31.92 million to build. The following market data on DEI's securities is current: Debt: 229,000 7 percent coupon bonds outstanding, 25 years to maturity, selling for 107 percent of par; the bonds have a $1,000 par value each and make semiannual payments. Common stock: 8,700,000 shares outstanding, selling for $70.90 per share; the beta is 1.3. Preferred stock: 449,000 shares of 4 percent preferred stock outstanding, selling for $80.90 per share and and having a par value of $100. Market: 6 percent expected market risk premium; 4 percent risk-free rate. DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 7 percent on new common stock issues, 5 percent on new preferred stock issues, and 3 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI's tax rate is 40 percent. The project requires $1,275,000 in initial net working capital investment to get operational. Assume Wharton raises all equity for new projects externally. a. Calculate the project's initial Time 0 cash flow, taking into account all side effects. Assume that the net working capital will not require flotation costs. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) Cash flow $ b. The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of 1 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI's project. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) % Discount rate c. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for $4.4 million. What is the aftertax salvage value of this plant and equipment? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) $ Aftertax salvage value d. The company will incur $6,700,000 in annual fixed costs. The plan is to manufacture 16,500 RDSs per year and sell them at $10,750 per machine; the variable production costs are $9,350 per RDS. What is the annual operating cash flow (OCF) from this project? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) $ Operating cash flow e. DEI's comptroller is primarily interested in the impact of DEI's investments on the bottom line of reported accounting statements. What will you tell her is the accounting break-even quantity of RDSs sold for this project? (Do not round intermediate calculations and round your final answer to the nearest whole number.) units Break-even quantity f. Finally, DEI's president wants you to throw all your calculations, assumptions, and everything else into the report for the chief financial officer; all he wants to know is what the RDS project's internal rate of return (IRR) and net present value (NPV) are. Assume that the net working capital will not require flotation costs. (Enter your NPV answer in dollars, not millions of dollars (e.g., 1,234,567). Enter your IRR answer as a percent. Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).) % IRR NPV $ 4) Taylor s has a beta of .78 and a debt-to-equity ratio of .2. The market rate of return is 10.6 percent, the tax rate is 34 percent, and the risk-free rate is 1.4 percent. The pretax cost of debt is 6.1 percent. What is the firm's WACC? 8.08% 7.67% 8.16% 9.96% 7.82% 10) Which one of these is represented by the slope of the characteristic line? market beta market variance security risk premium security beta market risk premium 11) Which one of these statements related to beta is correct? The beta of a risk-free security is set at 1. The higher the beta the lower the risk of a security. Beta measures the risk of a single security if held in a large, diversified portfolio. Beta measures the total risk of a single security whether held independently or as part of a portfolio. A stock with a high standard deviation will also have a high beta. 12) The asset beta is defined as the beta of: a fully diversified portfolio. an undiversified portfolio. the common stock of a levered firm. a risk-free security. the common stock of an unlevered firm. 15) The beta of a security provides an estimate of the: characteristic line for the security. slope of the capital market line. slope of the security market line. the market risk premium. total risk of the individual security. 24) Why is an accurate WACC so important when evaluating a new project? Assume a negative cash outflow at Time 0 and positive project cash flows thereafter. The coupon rate on new bonds issued to fund the project will be set equal to WACC. The project WACC will replace the firm WACC as the discount rate for all future projects. The project's accept/reject decision will be based on the NPV calculated using that WACC. The return to shareholders will be limited by the WACC