WACC
Williams, Inc., has compiled the following information on its financing costs:

The company is in the 21 percent tax bracket and has a target debt-equity ratio of 60 percent. The target short-term debt/long-term debt ratio is 20 percent.

a. What is the company's weighted average cost of capital using book value weights?
b. What is the company's weighted average cost of capital using market value weights?
c. What is the company's weighted average cost of capital using target capital structure weights?

d. What is the difference between WACCs? Which is the correct WACC to use for project evaluation?

Show all the steps and don't round off calculations.

Machine cost = $500,000

Project life = 2 years

Tax allowance for machine = 20% (reducing balance method)

Tax rate = 15% (payable half in the current year)

Cost of capital before tax = 10%

General rate of inflation = 4%

The incremental cash inflows from project = $2 million p.a (in today’s value)

The resale value of the machine is calculated at the end of the project to be the same as the net book value of the asset at the time of sale.

Compute the NPV.

Stock Dividends
The owners' equity accounts for Octagon International are shown here:

Common stock ($1 par value) $ 25,000
Capital surplus 135,000
Retained earnings 487,600
Total owners' equity $647,600

a. If the company's stock currently sells for $39 per share and a 10 percent stock dividend is declared, how many new shares will be distributed? Show how the equity accounts would change.

b. If the company declared a 25 percent stock dividend, how would the accounts change?

Show all the steps and don't round off calculations.

ROE and Leverage
Suppose the company in Problem 1 has a market-to-book ratio of 1.0.
a. Calculate return on equity, ROE, under each of the three economic scenarios before any
debt is issued. Also calculate the percentage changes in ROE for economic expansion and recession, assuming no taxes.
b. Repeat part (a) assuming the firm goes through with the proposed recapitalization.
c. Repeat parts (a) and (b) of this problem assuming the firm has a tax rate of 21 percent.

Please show all the steps and don't round off calculations.

Problem 1 :
Sunrise, Inc., has no debt outstanding and a total market value of 245000. Earnings before interest and taxes, EBIT, are projected to be $19,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 40 percent lower. The company is considering a $58800 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Ignore taxes for this problem. Assume the stock price is constant under all scenarios.

Capital Structure and Growth
Edwards Construction currently has debt outstanding with a market value of $95,000 and a cost of 9 percent. The company has EBIT of $8,550 that is expected to continue in perpetuity. Assume there are no taxes.

a. What is the value of the company's equity? What is the debt-to-value ratio?
b. What are the equity value and debt-to-value ratio if the company's growth rate is 3 percent?
c. What are the equity value and debt-to-value ratio if the company's growth rate is 7 percent?

Show all the steps and don't round off calculations.

Break-Even EBIT and Leverage
Kolby Corp. is comparing two different capital structures. Plan I would result in 3,500 shares of stock and $37,440 in debt. Plan II would result in 2,800 shares of stock and $66,560 in debt. The interest rate on the debt is 10 percent.

a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $14,800. The all-equity plan would result in 4,400 shares of stock outstanding. Which of the three plans has the highest EPS? The lowest?

b. In part (a) what are the break-even levels of EBIT for each plan as compared to that for
an all-equity plan? Is one higher than the other? Why?

c. Ignoring taxes, when will EPS be identical for Plans I and II?

d. Repeat parts (a), (b), and (c) assuming that the corporate tax rate is 21 percent. Are the
break-even levels of EBIT different from before? Why or why not?

Show all the steps and don't round off calculations.

Cost of Capital
Harris, Inc., has equity with a market value of $18.5 million and debt with a market value of $7.3 million. Treasury bills that mature in one year yield 4 percent per year and the expected return on the market portfolio is 11 percent. The beta of the company's equity is 1.15. The firm pays no taxes.

a. What is the company's debt-equity ratio?
b. What is the firm's weighted average cost of capital?
c. What is the cost of capital for an otherwise identical all-equity firm?

Show all the steps and don't round off calculations.

Alpha has 10 million shares outstanding with a market price of $5 per share and no debt. The company generates consistently stable earnings and pays a corporate tax rate of 35%. The firm just announces it will issue a consol (or perpetuity) bond with a par value of $10 million at a coupon rate of 5%. The company will use the borrowed funds to repurchase outstanding shares.

i. What is the stock price of Alpha On the announcement date?

ii.What is the stock price of Alpha On the date when the consol bond is issued but before the share repurchase?

iii. What is the stock price of Alpha After the share repurchase?

Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $4 million as a result of an asset expansion presently being undertaken. Fixed assets total $3 million, and the firm plans to maintain a 50% debt-to-assets ratio. Rentz's interest rate is currently 8% on both short-term and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 14% of total sales, and the federal-plus-state tax rate is 40%. What is the expected return on equity under each current assets level? Round your answers to two decimal places.

Restricted policy %

Moderate policy %

Relaxed policy %

Dealer A offers the following exchange rates:

1 USD = 1.12 CAD
1 USD = 0.849 GBP

Dealer B offers the following exchange rates:
1 CAD = 0.836 GBP

What is the arbitrage profit on $39,752?

Enter your answer round off two two decimal points.

Question 5

Consider the following stock information about Tencent and HSBC

1. What’re the expected return on each stock?
2. What’re the standard deviation on each stock?
3. The risk free rate is 1.5%. Based on the CAPM, If Tencent’s market beta is 1.5, what’s the beta of HSBC?
4. If you invested 65 percent in Tencent and 35 percent in HSBC, what is your portfolio expected return? The standard deviation? .
5. Given the portfolio information in (d) and beta information in (c), what is the portfolio’s market beta?

Question 6

SmartCar Corporation has 1 million shares of common stock outstanding, 20,000 shares of preferred stock outstanding, and 40,000 corporate bonds outstanding. The common stocks sell for $25, with a market beta of 1.5. The corporate bonds sell for $950 and the current YTM is 5%. The preferred stock currently sells for $100, with an annual dividend payment of $8 per share. The risk-free rate is 2% and the market expected return is 8%. SmarCar’s corporate tax rate is 35%. What is SmartCar’s cost of capital?

Jose, age 25, currently saves $7000 per year in his retirement account which is expected to earn 5% return. Jose is planning to retire at 62 and needs to fund his retirement upto age, 85. He has estimated that the annual amount needed during retirement would be $47,000 in today's dollar terms. The inflation rate is expected to be 1.5%. Compute the additional annual savings (if needed) to fund the shortfall in retirement account (if any).

A: $6030

B: $6090

please show work