WACC and Capital Budgeting Homework Problems 1. Calculate the cost of capital for the following building. The outstanding bonds have a 6% coupon and a 5.2% yield to maturity. The appropriate tax rate is 30%. The preferred stock carries a $3.50 dividend and is priced at $45 per share. The expected risk-free rate of return is 1% and the expected return on the market is 7%. The common stock has a beta of 1.6. If they plan to use 22% debt financing, 3% preferred financing and 75% common stock financing, what is the weighted average cost of capital? 2. A company has been presented with the following investment opportunity: The investment outlay is expected to be $600,000 in Year 0. After that, the project is expected to earn end-of-year after-tax operating cash flows of $150,000 in Year 1, S150,000 in Year 2, $250,000 in Year 3 and $300,000 in Year 4. If your cost of capital is 8%, what is the NPV and IRR for the project? 3. A company buys $5 million in equipment for a new project. The equipment had $50,000 in installation and transportation. The project required $150,000 in additional inventories and $30,000 in additional accounts payable. What is the initial investment of the project? 4. You have been given the following information for a project you are evaluating. Revenues are expected to be $1.8 million per year. Operating costs are expected to be 75% of revenues and fixed costs are expected to be S150,000 per year. Depreciation in year one is expected to be 10%. Tax rate is 25%. Calculate the year 1 operating cash flow. 5. A project you are evaluating involves buying a machine that you will be able to sell for $200,000 when you are done with it. Your tax rate is 20%. The project also required $50,000 in inventory. What is your terminal cash flow? Notes 0 Done On question 4- The capital expenditures for depreciation. Assume equipment cost is $5,000,000