1. Given the following information, calculate the weighted average cost of capital for Hamilton Corp.
Percent of capital structure:
? Debt? ? ? ? ? ? ? 55%
? Preferred stock? ? ? 10%
? Common equity? ? ? 35%
Additional information:
l Bond coupon rate 12%
l Bond yield to maturity? ? 10%
l Dividend, expected common $5.00
l Dividend, preferred? ? $ 10.00
l lPrice, common? ? ? ? $ 60.00
l Price, preferred? ? ? ? $105.00
l Flotation cost, preferred? ? $40
l Growth rate? ? ? ? ? ? ? 7%
l Corporate tax rate? ? ? ? ? ? 40%
Oregon Forest Products will acquire new equipment that falls under the SIX-year Straight line depreciation method with 20,000 residual value. The cost is $500,000. If the equipment is purchased, the following earnings before depreciation and taxes will be generated for the next six years.
Year 1? $112,000
Year 2? 105,000
Year 3? 182,000
Year 4? 153,000
Year 5? 137,000
Year 6? 132,000
The firm is in a 30 percent tax bracket and has a 12 percent cost of capital. Should Oregon Forest Products purchase the equipment? Use the net present value method ，IRR，PB and PI.
3.
The initial investment of ABC in land and equipment will be $150,000. Of this amount, $80,000 is subject to five-year straight line depreciation. The balance is in nondepreciable property. The contract covers five years; at the end of five years, the nondepreciable assets will be sold for $50,000. The depreciated assets will have 1,000 resale value. The contract will require an additional investment of $55,000 in working capital at the beginning of the first year and, of this amount, $30,000 will be returned to STC after six years. The investment will produce $60,000 in income before depreciation and taxes for each of the five years. The tax rate is 30% and 12% cost of capital. Should the investment be undertaken? Use the NPV and IRR method.
