Zoso is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over six years using the straight-line method. The new cars are expected to generate $160,000 per year in earnings before taxes and depreciation for six years. The company is entirely financed by equity and has a 40 percent tax rate. The required return on the companys unlevered equity is 11 percent, and the new fleet will not change the risk of the company. The risk-free rate is 7 percent.

a.	What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Maximum price

$

b.

Suppose the company can purchase the fleet of cars for $465,000. Additionally, assume the company can issue $375,000 of six-year debt at the risk-free rate of 7 percent to finance the project. All principal will be repaid in one balloon payment at the end of the sixth year. What is the adjusted present value (APV) of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

APV

$

If Wild Widgets, Inc., were an all-equity company, it would have a beta of 1.5. The company has a target debtequity ratio of .4. The expected return on the market portfolio is 11 percent, and Treasury bills currently yield 5.3 percent. The company has one bond issue outstanding that matures in 20 years and has a coupon rate of 9.6 percent. The bond currently sells for $1,210. The corporate tax rate is 34 percent.

a.	What is the companys cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Cost of debt

%

b.	What is the companys cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Cost of equity

%

c.	What is the companys weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

WACC

%

Watson, Inc., is an all-equity firm. The cost of the companys equity is currently 10 percent, and the risk-free rate is 4.6 percent. The company is currently considering a project that will cost $11.73 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.31 million.

If the company has a tax rate of 40 percent, what is the net present value of the project?

Dorman Industries has a new project available that requires an initial investment of $5.7 million. The project will provide unlevered cash flows of $795,000 per year for the next 20 years. The company will finance the project with a debt-to-value ratio of .3. The companys bonds have a YTM of 6.7 percent. The companies with operations comparable to this project have unlevered betas of 1.27, 1.20, 1.42, and 1.37. The risk-free rate is 3.7 percent, and the market risk premium is 6.9 percent. The company has a tax rate of 40 percent.

What is the NPV of this project?