Question

In: Accounting

The Two Dollar Store has a cost of equity of 10.9 percent, the YTM on the...

The Two Dollar Store has a cost of equity of 10.9 percent, the YTM on the company's bonds is 5.6 percent, and the tax rate is 40 percent. If the company's debt–equity ratio is .45, what is the weighted average cost of capital?

a-8.56%

b- 9.13%

c- 5.70%

d- 8.21%

e- 7.53% (NOT CORRECT)

Dyrdek Enterprises has equity with a market value of $12.7 million and the market value of debt is $4.50 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 2.2 percent. The new project will cost $2.58 million today and provide annual cash flows of $671,000 for the next 6 years. The company's cost of equity is 11.83 percent and the pretax cost of debt is 5.07 percent. The tax rate is 35 percent. What is the project's NPV?

a- $192,088 .(NOT CORRECT)

b- $377,207

c- $579,510

d- $194,678

e- $158,451

Expert Solution

Answer 1)

	Cost (%)	Weight	Product
Equity	10.90	1.00	10.90
Debt	3.36	0.45	1.51
Total		1.45	12.41

Weighted Average Cost of Capital = 12.41 / 1.45 = 8.56% (Option a)

Answer 2)

	Cost (%)	Weight	Product
Equity	11.83	12.70	150.24
Debt	3.30	4.50	14.83
Total		17.20	165.07

Weighted Average Cost of Capital = 165.07 / 17.20 = 9.5971%

Revised Cost of Capital for new project = 9.597 + 2.20 = 11.7971%

Year	Annual Cash Infow	PVIFA	PV of Cash Inflows
1 to 6	671000	4.135138	2774678

NPV = 2774678 - 2580000 = 194678 (Correct Option - d)

ekkarill92 answered 3 months ago

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