In: Finance
Question 18-22 |
Droz's Hiking Gear, Inc. has found that its common equity capital shares have a beta equal to 1.5 while the risk-free return is 8 percent and the expected return on the market is 14 percent. It has 7-year semiannual maturity bonds outstanding with a price of $767.03 that have a coupon rate of 7 percent. The firm is financed with $140,000,000 of common shares (market value) and $60,000,000 of debt. Droz's, is subject to a 35 percent marginal tax rate. The management of Droz’s, is considering an expansion project that costs $1.2 million. The project will produce a cash inflow of $600,000 for 5 years. |
What is the fraction of each securities? (Round to the two decimal places.) |
|
A) | x d e b t = 0.3 , x c s = 0.7 |
B) | x d e b t = 0.7 , x c s = 0.3 |
C) | x d e b t = 0.4 , x c s = 0.6 |
D) |
What is the pre-tax cost of debt? (Round to the nearest percent.) |
|
A) | 6% |
B) | 8% |
C) | 12% |
D) | 16% |
What is the cost of common equity? (Round to the nearest percent.) |
|
A) | 13% |
B) | 15% |
C) | 17% |
D) | 19% |
What is the WACC? (Round to the two decimal places.) |
|
A) | 17.36% |
B) | 16.48% |
C) | 15.64% |
D) | 14.24% |
What is the NPV of this project and should Droz’s Hiking Gear, Inc. invest in this project? (Round to the nearest dollar.) |
|
A) | -$53,113, No |
B) | $946,887, Yes |
C) | $848,023, Yes |
D) | -$45,167, No |