Finance Problems
Autor: sarahwolfe15 • April 13, 2015 • Case Study • 733 Words (3 Pages) • 1,367 Views
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- Firm A’s capital structure contains 20 percent debt and 80 percent equity. Firm B’s capital structure contains 50 percent debt and 50 percent equity. Both firms pay 7 percent annual interest on their debt. The stock of firm A has a beta of 1.0 and the stock of firm B has a 1.375 beta. The risk free rate of interest equals 4 percent and the expected return on the market portfolio equals 12 percent.
- Calculate the WACC for each firm assuming there are no taxes.
- Recalculate the WACC figures assuming that the firms face a marginal tax rate of 34 percent.
- A firm has a capital structure containing 60 percent debt and 40 percent common stock equity. Its outstanding bonds offer investors a 6.5 percent yield to maturity. The risk free rate currently equals 5 percent and the expected risk premium on the market portfolio equals 6 percent. The forms common stock beta is 1.2
- What is the firms required return on equity
- Ignoring taxes, use your findings in part (a) to calculate the firms WACC
- Assuming a 40 percent marginal tax rate, recalculate the firms WACC found in part (b).
- JK’s marketing department believes that the firm can sell the product for $500 per unit, but feels that if the initial market response is weak, the price may have to be 20% lower in order to be competitive with existing products. The firms best estimates of its costs are fixed cost of $3.6 million and variable cost of $325 per unit. Although the firm expects this cost to be $325 per unit it could be as much as 8 percent above that value. The firm expects to sell about 50,000 units per year.
- Calculate the firms volume breakeven point (BEP) assuming its initial estimates are accurate.
- Perform a sensitivity analysis by calculating the breakeven point for all combinations of the sale price per unit and variable cost per unit. (hint: there are four combinations)
- In the best case, how many units will the firm need to sell to break even
- In the worst case how many units will the firm need to sell to break even
- If each of the possible price/variable cost combinations is equally probable, what is the firms expected breakeven point
- A project has the following stream of cash flows:
Year Cash Flows
0 $17,500
1 - 80,500
2 138,425
3 -105,455
4 30,030
a. What are the projects IRR’s (4 of them)
- Initial cash outflow is $20,000 and a project is expected to yield cash inflows of $4,400 per year for 7 years, the firm has a 10 percent cost of capital.
- Determine the NVP for the project
- Determine the IRR for the project
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