· 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