Chapter 9 – Q10
10. Net present value. Lepton Industries has four potential projects, all with an initial cost of $ 1,500,000. The capital budget for the year will allow Lepton to accept only one of the four projects. Given the discount rates and the future cash flows of each project, determine which project Lepton should accept.
ANSWER: Chapter 11 – Q12
12. Book value versus market value components. The CFO of DMI is trying to determine the company’ s WACC. Brad, a promising MBA, says that the company should use book value to assign the components percentage for the WACC. Angela, a long-time employee and experienced financial analyst, says the company should use market value to assign the components. The after-tax cost of debt is at 7 %, the cost of preferred stock is at 11 %, and the cost of equity is at 14 %. Calculate the WACC using both the book value and market value approaches with the following information. Which do you think is better? Why?
Chapter 16
9. Finding the WACC. Monica is the CFO of Cooking for Friends( CFF) and uses the pecking order hypothesis( POH) philosophy when she raises capital for company projects. Currently, she can borrow up to $ 600,000 from her bank at a rate of 8.5 %, float a bond for $ 1,100,000 at a rate of 9.25 %, or issue additional stock for $ 1,300,000 at a cost of 17 %. What is the WACC for CFF if Monica chooses to invest: a. $ 1,000,000 in new projects? b. $ 2,000,000 in new projects? c. $ 3,000,000 in new projects?