Beta company is a publicly traded company, with 20 million shares trading at $ 70 a share and $ 600 million in debt (market value as well as book value) outstanding. The firm derives 70% of its value from cloud storage and hosting, and the remaining 30% from technical service. The unlevered beta is 0.8 for firms in the cloud business and 1.2 for firms in the technical service business. Beta company is rated A and can borrow money at 5%. The risk-free rate is 2% and the market risk premium is 8%; the corporate tax rate is 30%, and the firm has a capital gains tax rate of 20%.

1. Estimate the cost of capital for Beta Company

2. Beta Company is considering acquiring Alpha Company, another cloud hosting company (which derives 100% of its revenues from hosting) for $ 350 million, three quarters of which it plans to fund by a new debt issue (which will cause its rating to drop and its cost of debt to rise to 5.5%) and a quarter by issuing new stock. Estimate the cost of capital after the acquisition.

The company is considering a five-year project that will require $680,000 for new manufacturing equipment that will be depreciated straight-line to a zero-book value over five years (depreciation rate is 20% per year). At the end of the project, the equipment can be sold for 15 percent of its original cost. The project requires an initial investment in net working capital of $90,000 (all of which will be recovered at the end of the project). The project is expected to generate annual sales of $845,000 with annual costs of $545,000. The tax rate is 25 percent and the required rate of return is 17.5 percent. Instructions: Complete the pro forma and determine total cash flows for each year of project’s life. Calculate initial outlay (total cash flow in Year 0), after-tax salvage value in Year 5, and NPV of the project. Explain your decision whether you recommend to accept or reject the project.

Federal Biochem's preffered stock pays a fixed annual dividend of $2.4. The company's common stock just paid a dividend of $1 and this dividend is expected to grow at 4% every year starting from today. The required rate of return for both securities is 12%. If you were to buy the preffered stock today and convert it to common stock in 5 years, what would be the approximate conversion ratio from preferred stock to common stock that would allow you to earn annual rate of return of 14.77% on your investment on the preferred stock over the five year investment horizon?

The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 3% per year. Callahan's common stock currently sells for $27.25 per share; its last dividend was $2.00; and it will pay a $2.06 dividend at the end of the current year.

1. Using the DCF approach, what is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.

     

2. If the firm's beta is 0.6, the risk-free rate is 4%, and the average return on the market is 12%, what will be the firm's cost of common equity using the CAPM approach? Round your answer to two decimal places.

     

3. If the firm's bonds earn a return of 10%, based on the bond-yield-plus-risk-premium approach, what will be r_s? Use the midpoint of the risk premium range discussed in Section 10-5 in your calculations. Round your answer to two decimal places.

     

4. If you have equal confidence in the inputs used for the three approaches, what is your estimate of Callahan's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.

     

How to treat and define sunk costs, opportunity costs, and cannibalized sales. Also, which of these items should be considered (or ignored) when estimating cash flows in a capital budgeting decision?

How to calculate the WACC? How to treat the tax consequence of debt in the calculation? Example please, No Excel

• Explain why a firm would use debt in its capital structure?
• What are the advantages and disadvantages?
• What types of firms would tend to have high costs of capital? What types would have low costs of capital? Why?

Your firm currently has $64 million in debt outstanding with a  6% interest rate. The terms of the loan require it to repay $16 million of the balance each year. Suppose the marginal corporate tax rate is 35%​,and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this​ debt?The present value of the interest tax shields is

​$nothing

million.  ​(Round to two decimal​ places.)

Question Three

Explain why the discount rate for the time preference method is different than the discount rate for the social opportunity cost of capital. For a public project with a very long time period (say 40 years) and very high initial capital costs, show how the discount rate can have a major impact on the social NPV. (give a numerical example of each method)

The City of Calgary is considering the construction of a new high school in order to accommodate a growing population. Before they proceed, they would like to conduct a Benefit/Cost analysis using different time horizons and interest rates. An economist for the City has tabulated the following benefits and costs in the table below.

*This value was estimated by a City survey. The survey asked people their willingness to pay for a high school in their neighbourhood.

1. a) Calculate the NPV with interest rates of 3 percent, 5 percent and 8 percent and with time horizons at 30 and 60 years. Comment on how different interest rates and time horizons affect the economic value of this public project.
   (Note: Show your calculation for one NPV. You do not need to show them for each one)

2. b) For someone working on the Calgary School Board, (a Spender) what interest and time horizon would they be promoting?

7. You have a 3-year maturity, 5% coupon bond traded at par. If the interest rate were to increase by 125 basis points, your predicted new price for the bond based on duration only is _________ (round to the nearest dollar).

   1. $955

   2. $966

   3. $1,000

   4. $1,042

   5. None of the above

A company is considering purchasing a new technology that requires an initial capital

investment of $9,000. Annual revenues from the technology are predicted to be $6,500, and

annual expenses will be $4,000. The equipment has an estimated life of 11 years, at which time

the salvage value is expected to be $1,000. The MARR for the company is 15%.

a. Using the annual worth (AW) method, determine whether purchasing the equipment is

economically justified.

b. Repeat part (a) using the internal rate of return (IRR) method.

c. Using the present worth (PW) method, determine the break-even time period after which

purchase of the equipment generates a profit. (Find N when PW = 0)