United Business Forms capital structure is as follows:

Debt 25%

Preferred stock 25

Common equity 50

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The aftertax cost of debt is 6 percent, the cost of preferred stock is 9 percent, and the cost of common equity (in the form of retained earnings) is 12 percent.

Calculate United Business Forms weighted cost of each source of capital and the weighted average cost of capital. (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

Weighted cost

Debt (Kd) _____%

Preferred stock (Kp) _____

Common equity (Ke) _____

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Weighted average cost of capital (Ka) _______%

02.) Speedy Delivery Systems can buy a piece of equipment that should provide an 11 percent return and can be financed at 6 percent with debt. The CEO likes earning more than the cost of debt, and he thinks this would be a good deal. The firm can also buy a machine that would yield a 9 percent return but would cost 15 percent to finance through common equity. Earning less than the cost of equity sounds bad to the CEO. Assume debt and common equity each represent 50 percent of the firms capital structure.

(a) Compute the weighted average cost of capital. (Round your intermediate and final answers to 1 decimal place. Omit the "%" sign in your response.)

Weighted average cost of capital ___ %

(b) Which project(s) should be accepted?

Piece of equipment should be financed.

New machine should be financed.

3.) Assume a $200,000 investment and the following cash flows for two products:

Year Product X Product Y

1 $ 50,000 $ 50,000

2 80,000 60,000

3 70,000 50,000

4 30,000 50,000

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(a) Calculate the payback for products X and Y. (Round your answers to 2 decimal places.)

Payback period

Product X ___ Years

Product Y ___ Years

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(b) Which alternative would you select under the payback method?

Product X

Product Y

4.) Hamilton Control Systems will invest $60,000 in a temporary project that will generate the following cash inflows for the next three years. Use Appendix B.

Year Cash flow

1 $20,000

2 33,000

3 30,000

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The firm will also be required to spend $15,000 to close down the project at the end of the three years.

(a) Compute the net present value if the cost of capital is 9 percent. (Round "PV Factor" to 3 decimal places. Round your answer to the nearest dollar amount. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

Net present value _____$

(b) Should the investment be undertaken?

Yes

No

5.) Diaz Camera Company is considering two investments, both of which cost $12,000. The cash flows are as follows:

Use Appendix B.

Year Project A Project B

1 $5,000 $4,000

2 5,000 4,000

3 6,000 11,000

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(a-1) Calculate the payback period for project A and project B. (Round your answers to 2 decimal places.)

Payback period

Project A _____years

Project B ______years

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(a-2) Which of the two projects should be chosen based on the payback method?

Project A

Project B

(b-1) Calculate the net present value for project A and project B. Assume a cost of capital of 8 percent. (Round "PV Factor" to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Net present value

Project A $ _______

Project B $ _______

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(b-2) Which of the two projects should be chosen based on the net present value method?

Project B

Project A

(c) Should a firm normally have more confidence in answer derived based on Net present value method or Payback method?

Payback method

Net present value method

6.) Kings Department Store is contemplating the purchase of a new machine at a cost of $32,065. The machine will provide $5,400 per year in cash flow for 11 years. Kings has a cost of capital of 9 percent. Use Appendix D.

(a) What is the internal rate of return? (Round "PV Factor" to 3 decimal places. Round your answer to the nearest whole percent. Omit the "%" sign in your response.)

Internal rate of return _______%

(b) Should the project be undertaken?

No

Yes

7.) Wildcat Oil Company was set up to take large risks and is willing to take the greatest risk possible. Richmond Construction Company is more typical of the average corporation and is risk-averse.

Projects Returns: Standard

Expected value deviation

A $ 268,000 $ 225,000

B 756,000 464,000

C 169,000 135,000

D 162,000 277,000

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(a-1) Compute the coefficients of variation. (Round your answers to 3 decimal places.)

Coefficient of variation

Project A ______

Project B ______

Project C ______

Project D ______

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(a-2) Which of the following four projects should Wildcat Oil Company choose?

Project A

Project B

Project C

Project D

(b) Which one of the four projects should Richmond Construction Company choose based on the same criteria of using the coefficient of variation?

Project B

Project C

Project D

Project A