project would generate cash flows B u s i n e s s F i n a n c e

1) (Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks.

1. Given the information in the table, what is the expected rate of return for stock B?
2. What is the standard deviation of stock B?
3. What is the expected rate of return for stock A?
4. Based on the risk (as measured by the standard deviation) and return of each stock which investment is better? (Round to 2 decimal places)

2) (NPV, PI, and IRR calculations) Fijisawa, Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. The initial outlay would be $1,960,000, and the project would generate cash flows of $380,000 per year for six years. The appropriate discount rate is 4.0 percent.

1. Calculate the net present value.
2. Calculate the profitability index.
3. Calculate the internal rate of return.
4. Should this project be accepted? Why or why not?

3) (Cost of debt) Sincere Stationery Corporation needs to raise $531,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 10.1 percent with interest paid semiannually and a 15-year maturity. Investors require a rate of return of 8.7 percent.

1. Compute the market value of the bonds.
2. How many bonds will the firm have to issue to receive the needed funds?
3. What is the firm’s after-tax cost of debt if the firm’s tax rate is 32 percent?

4) (Cost of debt) Sincere Stationery Corporation needs to raise $451,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 11.1 percent with interest paid semiannually and a 15-year maturity. Investors require a rate of return of 9.6 percent.

1. Compute the market value of the bonds.
2. How many bonds will the firm have to issue to receive the needed funds?
3. What is the firm’s after-tax cost of debt if the firm’s tax rate is 34 percent?

5) (Weighted average cost of capital) As a consultant to GBH Skiwear, you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. You have determined the market value of the firm’s current capital structure (which the firm considers to be its target mix of financing sources) as follows:

To finance the purchase, GBH will sell 20-year bonds with a $1,000 par value paying 8.4 percent per year (paid semiannually) at the market price of $929. Preferred stock paying a $2.51 dividend can be sold for $34.03. Common stock for GBH is currently selling for $49.09 per share. The firm paid a $4.06 dividend last year and expects dividends to continue growing at a rate of 4.5 percent per year into the indefinite figure. The firm’s marginal tax rate is 32 percent.

1. 1. Calculate component weights of capital:
      1. What is the weight of debt in the firm’s capital structure?
      2. What is the weight of preferred stock in the firm’s capital structure?
      3. What is the weight of common stock in the firm’s capital structure?
   2. Calculate component costs of capital:
      1. What is the after-tax cost of debt for the firm?
      2. What is the cost of preferred stock for the firm?
      3. What is the cost of common equity for the firm?
   3. Calculate the firm’s weighted average cost of capital.
   4. What is the discount rate you should use to evaluate the warehouse project? (Round to 3 decimal places.)

6) (Capital structure weights) In August of 2010 the capital structure of the Emerson Electric Corporation (EMIR) (measured in book and market values) appeared as follows:

1. What weights should Emerson use when computing the firm’s weighted average cost of capital?
2. What is the appropriate weight of debt? (Round to 1 decimal place.)
3. What is the appropriate weight of common equity? (Round to 1 decimal place.)