Weighted Average Cost of Capital Gardner, Inc., plans to finance its expansion by raising the needed investment capital from the following sources in the indicated proportions and respective capital cost rates: Capital Cost Bonds Source Proportion Rate 40% 11% Preferred stock 20% 7% Common stock 30% 10% Retained earnings 10% 7% 100% Calculate the weighted average cost of capital. Round answers to one decimal place. For example, 0.457 = 45.7%. Weighted Average Cost of Capital Bonds % Preferred stock % Common stock % Retained earnings % % After-Tax Cash Flows For each of the following independent situations, compute the net after-tax cash flow amount by subtracting cash outlays for operating expenses and income taxes from cash revenue. The cash outlay for income taxes is determined by applying the income tax rate to the cash revenue received less the cash and noncash (depreciation) expenses. Cash revenue received Cash operating expenses paid Depreciation on tax return Income tax rate A B $96,000 $456,000 $226,000 60,000 321,000 151,000 18,000 36,000 26,000 40% 30% 20% C Do not use negative signs with any of your answers below. A B C Cash revenue $ $ $ Cash outlays: Operating expenses Income taxes Total cash outlays Net after-tax cash flow $ +A $ $ Anderson Company must evaluate two capital expenditure proposals. Anderson's hurdle rate is 12%. Data for the two proposals follow. Proposal Proposal X Y Required investment Annual after-tax cash inflows $60,000 $60,000 12,000 After-tax cash inflows at the end of years 3, 6, 9, and 12 36,000 12 years 12 years Life of project Using net present value analysis, which proposal is the more attractive? Do not use negative signs with your answers. Round PV answers to the nearest whole number. Use rounded answers for subsequent calculation of net present value. Proposal X Proposal Y Net present value Initial outflows $ $ PV of future cash flows Net present value $ $ Which proposal is more attractive? nternal Rate of Return Analysis Cooper Corporation must evaluate two capital expenditure proposals. Cooper's hurdle rate is 10%. Data for the two proposals follow. Proposal Proposal X Y Required investment Annual after-tax cash inflows $230,000 $230,000 44,000 After-tax cash inflows at the end of years 3, 6, 9, and 12 Life of project 125,000 12 years 12 years What is the internal rate of return for Proposal X? For Proposal Y? Use Excel to compute your answers. Round answers to the nearest whole percentage (ex: 0.1854 = 19%) Proposal X % Proposal Y % Cash Payback Anderson Company must evaluate two capital expenditure proposals. Anderson's hurdle rate is 12%. Data for the two proposals follow. Proposal Proposal X Y Required investment Annual after-tax cash inflows $660,000 $660,000 82,800 After-tax cash inflows at the end of years 3, 6, 9, and 12 223,000 Life of project 12 years 12 years What is the cash payback period for Proposal X? For Proposal Y? Hint: For Proposal Y, in what year (3, 6, 9 or 12) will the full original investment be recovered? Round Proposal X answer to one decimal place, if applicable. Proposal X years Proposal Y years Average Rate of Return Lakeland Company is considering the purchase of equipment for $170,000. The equipment will expand the Company's production and increase revenue by $56,000 per year. Annual cash operating expenses will increase by $10,000. The equipment's useful life is 10 years with no salvage value. Lakeland uses straight-line depreciation. The income tax rate is 35%. What is the average rate of return on the investment? Do not use negative signs with your answers. Increase in revenue Increase in expenses Pretax income from investment Income tax expense Net income from investment $ $ Round answer to the nearest whole percentage, if applicable. Average rate of return on investment %