· The first unit of debt has a cost of 7.5 %.
· The tax rate of Austin Enterprises is 40 %.
· For each additional unit of debt( each additional $ 2,000,000), the cost of debt rises by 0.85 %, and the beta of Austin Enterprises rises by 0.025.
Where is the WACC the lowest? Graph the results of the changing WACC
Chapter 12 Problem 17
Working capital and capital budgeting. Farbuck’ s Tea Shops is thinking about opening another tea shop. The incremental cash flow for the first five years is as follows:
· Initial capital cost = $ 3,500,000 Operating cash flow for each year = $ 1,000,000 Recovery of capital assets after five years = $ 250,000
The hurdle rate for this project is 12 %. If the initial cost of working capital is $ 500,000 for items such as teapots, teacups, saucers, and napkins, should Farbuck’ s open this new shop if it will be in business for only five years? What is the most it can invest in working capital and still have a positive net present value?
Chapter 13 Problem 18
Working capital and capital budgeting. Working capital investment is 25 % of the anticipated first year sales for Wally’ s Waffle House. The first-year sales are currently projected at $ 4,300,000. The incremental cash flow( not including working capital investment) is