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The Federal Reserve recently shifted its monetary policy, causing Lasik Vision’s WACC to change. Lasik had recently analyzed the project whose cash flows are shown below. However, the CFO wants to reconsider this and all other proposed projects in view of the Fed action. How much did the changed WACC cause the forecasted NPV to change? Assume that the Fed action will not affect the cash flows, and note that a project’s projected NPV can be negative, in which
case it should be rejected.
Old WACC = 10%
Year:
Cash flows:
New WACC = 8%
0
1
-$1,000
$500
2
$520
3
$540
Question 2
1.Johnson Industries finances its projects with 40% debt, 10% preferred stock, and 50% common stock.
The company can issue bonds at a YTM of 8.4%.
The cost of preferred stock is 9%.
The risk-free rate is 6.57%.
The market risk premium is 5%.
Johnson Industries’ beta is equal to 1.3.
Assume that the firm will be able to use retained earnings to fund the equity portion of its capital budget.
The company’s tax rate is 30%. What is the company’s WACC?
Question 3
The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000, is expected to last for 10 years and produces after-tax cash flows, including depreciation, of $44,503 per year. If the firm’s WACC is 14% and its tax rate is 40%, what is the project’s IRR?
Question 4
An analyst has collected the following information regarding Christopher Co.:
The company’s capital structure is 70% equity and 30% debt.
The YTM on the company’s bonds is 9%.
The company’s year-end dividend is forecasted to be $0.80 a share.
The company expects a constant dividend growth rate of 9% a year.
The company’s stock price is $25.
The company’s tax rate is 40%.
The company anticipates that it will need to raise new common stock this year, and flotation costs will equal 10% of the amount issued.
Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, calculate the company’s WACC.
Question 5
Klieman Company’s perpetual preferred stock sells for $90 per share and pays a $7.50 annual dividend per share. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the price paid by investors. What is the company’s cost of preferred stock?
