Finance-AW-Q349

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Problem Assignments and Solutions – Capital Structure
Calculate the correct answer in all problems
USE NPV, Rate, and IRR Functions as appropriate in Problems 4b, 4d. 4e, 5, and 8
Explain in words what you do to make each calculation
Explain in words what the answers mean
Points
1
10
Answer: Cost of debt after tax is 2.60%
Cost of retained earnings is 6.85%
2-A 3
Answer: The cost of equity is 17.25%
2-B
7
3 A company, West  Berwick Enterprises, has a capital structure as follows:
Total Capital \$1,000,000
Debt \$400,000
Preferred Stock \$100,000
Common Equity \$500,000
15
Cost of debt after tax is 4.20%
Cost of preferred stock is 5.94%
Cost of common stock is 10.24%
WACC is 7.39%
4
Net Cash Flow
Year Project A Project B
0 -\$4,000,000 -\$5,000,000
1 \$800,000 \$1,900,000
2 \$1,000,000 \$1,700,000
3 \$1,200,000 \$1,400,000
4 \$1,400,000 \$900,000
5 \$1,600,000 \$300,000
4-A Calculate the payback period for each project.
Project A Project B
Answer: 3.71 3.00 Payback Period in years. 6
4-B Calculate the net present value for each project.
Project A Project B
Answer: \$753,814.54 \$260,470.16 6
4-C Which project do you think will be approved, if only one project can be approved? Why?
Project A Project B
Answer: Yes No 3
4-D What if the required rate of return was 10%?
Answer: Project A Project B
\$404,989.72 (\$14,939.37) Net Present Value 6
Yes No
4-E What is the Internal rate of return?
Answer: Project A Project B 6
13.45% 9.85%
4-F Which is the best to use for deciding:  Payback, NPV or IRR?  Why? 8
5
6
6-A
6
6-B
6
7
6
11.99%
8
6
Total Points 100

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