Question

1)“Lobu” is a company that gets its financing resources from debt and equity. The company has 400 millions dollars debt, the interest rate 8%. Lobu have 100 millions of stocks, the stock price is 12 dollars per share. Assume Lobu’s beta is 0.8; Risk free rate 6%, market return 9% and tax rate 40%.

A) Calculate Lobu’s WACC

B) if Lobu has an expansion project that requires 30 millions dollars investment and generate 15 millions dollars per year (3 years). Calculate the NPV of the project (use WACC as discount rate)

2) Vitro wants to invest in a new Project with great expectative. The initial investment is $9,000. The first year the company expect a cash inflow of $10,000 and a cash outflow of $1000. The second and the third period expect to grow it’s cash inflow 20% per year and it’s cash outflows 10% per year. Calculate the MIRR of the project. (Finance rate 10% and Reinvestment rate 15%)

3) Calculate the after-tax cost of debt under each of the following conditions:

1. Interest rate, 13 percent; tax rate, 5 percent.
2. Interest rate, 13 percent; tax rate, 15 percent.
3. Interest rate, 13 percent; tax rate. 18 percent.

4) The expected market return is 14%, the Covariance between the company and the market return is 0.45. The risk free rate is 6% and the standard deviation of the market return is 0.68.

1. Calculate beta.   
2. Calculate CAPM

5) The stocks of the Enter prise “X” have a Beta equal to 1.2. In the stock market, its own resources (equity) represent 40% of the total amount of its financing sources. It is well known that in the market the return that it could be obtained without risk is 3% and the expected return of the market is 9%. Tax rate is 35%.

Calculate WAAC before and after tax if the cost of debt is 17%

Answer 1