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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
·
Initial cash flow = $13,700,000 outflow Cash flow years 1 through 10
= $2,850,000
What is the internal rate of return of the ten-year project with working
capital factored into the cash flow? What is the net present value at a 15%
weighted average cost of capital? What is the maximum investment in
working capital for an acceptable project with a 15% weighted average
cost of capital?
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FIN 419 Week 4 Team Assignment Problem Sets