A firm with a 13.5 percent cost of capital is evaluating two projects for this year’s capital budget.  The projects’ expected after-tax cash flows are as follows: Year: 0 1 2 3 Project X: -$10,000 $3,100 $5,400 $5,300 Project Y: -$5,000 $2,500 $1,900 $2,700 If Projects X and Y are mutually exclusive, which one(s) should the firm adopt?

The Bettencourt Company’s currently outstanding bonds have a 12.2 percent coupon and a 6.9 percent yield to maturity.  Bettencourt believes it could issue new bonds that would provide a similar yield to maturity.  If its marginal tax rate is 30 percent, what is Bettencourt’s after-tax cost of debt?

The Crabtree Company’s cost of common equity is 12 percent, its before-tax cost of debt is 7 percent, and its marginal tax rate is 30 percent.  Given Crabtree’s market value capital structure below, calculate its WACC. Long-term debt $26,000,000 Common equity   64,000,000 Total capital $90,000,000

A firm with a 10 percent cost of capital is considering a project for this year’s capital budget.  The project’s expected after-tax cash flows are as follows: Year: 0 1 2 3 4 Cash flow: -$10,000 $3,900 $4,200 $3,400 $4,900 Calculate the project’s profitability index (PI).

The Herron Company’s cost of common equity is 13 percent, its before-tax cost of debt is 10 percent, and its marginal tax rate is 30 percent.  Given Herron’s market value capital structure below, calculate its WACC. Long-term debt $29,000,000 Common equity   51,000,000 Total capital $80,000,000

If a firm’s beta is 0.6, the risk-free rate is 5%, and the expected return on the market is 13%, what will be the firm’s cost of equity using the CAPM approach?

A firm with a 9.5 percent cost of capital is considering a project for this year’s capital budget.  The project’s expected after-tax cash flows are as follows: Year: 0 1 2 3 4 Cash flow: -$9,000 $4,100 $3,200 $3,800 $3,000 Calculate the project’s internal rate of return (IRR).

Sperry Corporation can invest in one of two mutually exclusive machines that will make a product it needs for the next 4 years.  Machine A costs $9 million but realizes after-tax inflows of $6.3 million per year for 2 years, after which it must be replaced.  Machine B costs $12 million and realizes after-tax inflows of $4.8 million per year for 4 years.  Based on the firm’s cost of capital of 12 percent, the NPV of Machine B is $2,579,277, with an equivalent annual annuity (EAA) of $849,187 per year.  Calculate the EAA of Machine A. Compare your result to that of Machine B and decide which to recommend.

Thurman Industries plans to issue a $100 par perpetual preferred stock with a fixed annual dividend of 12 percent of par.  It would sell for $90.00, but flotation costs would be 5 percent of the market price.  What is the percentage cost of preferred stock after taking flotation costs into account?

If a firm’s beta is 1.6, the risk-free rate is 4.5%, and the expected return on the market is 10.5%, what will be the firm’s cost of equity using the CAPM approach?