C11.rcises.doc

Risk, Cost of Capital, and Capital Budgeting5. 【Calculating WACC】 Mullineaux Corporation has a target capital structure of 55 percent common stock and 45 percent debt. Its cost of equity is 16 percent, and the cost of debt is 9 percent. The relevant tax rate is 35 percent. What is Mullineauxs WACC?11. Finding the WACC Given the following information for Huntington Power Co., nd the WACC. Assume the companys tax rate is 35 percent.Debt: 4,000 7 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 103 percent of par; the bonds make semiannual payments.Common stock: 90,000 shares outstanding, selling for $57 per share; the beta is 1.10.Market: 8 percent market risk premium and 6 percent risk-free rate.12. 【Finding the WACC】 Titan Mining Corporation has 9 million shares of common stock outstanding and 120,000 8.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.20, and the bonds have 15 years to maturity and sell for 93 percent of par. The market risk premium is 10 percent, T-bills are yielding 5 percent, and Titan Minings tax rate is 35 percent.a. What is the rms market value capital structure?b. If Titan Mining is evaluating a new investment project that has the same risk as the rmstypical project, what rate should the rm use to discount the projects cash ows?13. 【SML and WACC】 An all-equity rm is considering the following projects:The T-bill rate is 5 percent, and the expected return on the market is 12 percent.a. Which projects have a higher expected return than the rms 12 percent cost of capital?b. Which projects should be accepted?c. Which projects would be incorrectly accepted or rejected if the rms overall cost of capital were used as a hurdle rate?16. 【WACC and NPV】 Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of 1.3. Its considering building a new $45 million manufacturing facility. This new plant is expected to generate aftertax cash ows of $5.7 million in perpetuity. There are three nancing options:1. A new issue of common stock. The required return on the companys equity is 17 percent.2. A new issue of 20-year bonds. If the company issues these new bonds at an annual coupon rate of 9 percent, they will sell at par.3. Increased use of accounts payable nancing. Because this nancing is part of the companys ongoing daily business, the company assigns it a cost that is the same as the overall rm WACC. Management has a target ratio of accounts payable to long-term debt of .20. (Assume there is no difference between the pretax and aftertax accounts payable cost.) What is the NPV of the new plant? Assume that PC has a 35 percent tax rate.Solutions5.Using the equation to calculate the WACC, we find:WACC = .60 (.16) + .40(.09)(1 .35) = .1194 or 11.94%11.We will begin by finding the market value of each type of financing. We find: MVD = 4,000($1,000)(1.03) = $4,120,000MVE = 90,000($57) = $5,130,000And the total market value of the firm is:V = $4,120,000 + 5,130,000 = $9,250,000Now, we can find the cost of equity using the CAPM. The cost of equity is:RE = .06 + 1.10(.08) = .1480 or 14.80%The cost of debt is the YTM of the bonds, so:P0 = $1,030 = $35(PVIFAR%,40) + $1,000(PVIFR%,40) R = 3.36%YTM = 3.36% 2 = 6.72%And the aftertax cost of debt is:RD = (1 .35)(.0672) = .0437 or 4.37%Now we have all of the components to calculate the WACC. The WACC is:WACC = .0437(4.12/9.25) + .1480(5.13/9.25) = .1015 or 10.15%Notice that we didnt include the (1 tC) term in the WACC equation. We simply used the aftertax cost of debt in the equation, so the term is not needed here.12.a.We will begin by finding the market value of each type of financing. We find:MVD = 120,000(元1,000)(0.93) = 元111,600,000 MVE = 9,000,000(元34) = 元306,000,000And the total market value of the firm is:V = 元111,600,000 + 306,000,000 = 元417,600,000So, the market value weights of the companys financing is:D/V = 元111,600,000/元417,600,000 = .2672E/V = 元111,600,000/元417,600,000 = .7328b.For projects equally as risky as the firm itself, the WACC should be used as the discount rate.First we can find the cost of equity using the CAPM. The cost of equity is:RE = .05 + 1.20(.10) = .1700 or 17.00%The cost of debt is the YTM of the bonds, so:P0 = 元930 = 元42.5(PVIFAR%,30) + 元1,000(PVIFR%,30) R = 4.69% YTM = 4.69% 2 = 9.38%And the aftertax cost of debt is:RD = (1 .35)(.0938) = .0610 or 6.10%Now we can calculate the WACC as:WACC = .1700(.7328) + .0610 (.2672) = .1409 or 14.09%13.a.Projects X, Y and Z.b.Using the CAPM to consider the projects, we need to calculate the expected return of each project given its level of risk. This expected return should then be compared to the expected return of the project. If the return calculated using the CAPM is higher than the project expected return, we should accept the project; if not, we reject the project. After considering risk via the CAPM:EW= .05 + .60(.12 .05) = .0920 .11, so accept WEX = .05 + .90(.12 .05) = .1130 .13, so accept XEY = .05 + 1.20(.12 .05) = .1340 .16, so reject Zc. Project W would be incorrectly rejected; Project Z would be incorrectly accepted.16.We can use the debt-equity ratio to calculate the weights of equity and debt. The debt of the company has a weight for long-term debt and a weight for accounts payable. We can use the weight given for accounts payable to calculate the weight of accounts payable and the weight of long-term debt. The weight of each