A company's target debt-to-equity ratio is .6, its cost of equity is 11.8 percent, and its beta is1.2. The after-tax cost of debt is 6.4 percent, the tax rate is 34 percent, and the risk-free rate is3.2 percent. What discount rate should be assigned to a new project the firm is considering if the project's beta is estimated at 0.87?
5. A project has an internal rate of return of 11.76 percent and a beta of 1.22. The market rate of return is 9.8 percent, the tax rate is 35 percent, and the risk-free rate is 3.4 percent. Should this project be accepted according to the CAPM if the firm is all-equity financed? Why or why not?
6. A company currently has a debt-to-equity ratio of .45, its cost of equity is 13.6 percent, and its beta is 1.49. The pretax cost of debt is 7.8 percent, the tax rate is 35 percent, and the risk-free rate is 3.1 percent. The firm's target debt-to-equity ratio is 0.5. What discount rate should be assigned to a new project the firm is considering if the project is equally as risky as the overall firm and will be financed solely with debt?
4. A company has a target capital structure of 60 percent debt and 40 percent equity. The pretax cost of debt is 12.5 percent, the tax rate is 20 percent, and the cost of equity is 9.7 percent. The firm is considering a project that is equally as risky as the overall firm. The project has an initial cash outflow of $1.5 million and annual cash inflows of $350,000 at the end of each year for five years. What is the NPV of the project?
5. A company is 40% financed by risk-free debt and 60 percent equity. The treasury bill rate is 4%, the expected market rate of return is 12%, and the beta of the company’s common stock is 1.5. Tax rate is 20%. The firm is considering a project that is equally as risky as the overall firm. The project has an initial cash outflow of $2.8 million and annual cash inflows of $650,000 at the end of each year for four years. What is the NPV of the project?
6. A company has a capital structure of 35 percent debt and 65 percent equity. The pretax cost of debt is 12.0 percent, the tax rate is 34 percent, and the cost of equity is 17.5 percent. The firm is considering a project that is equally as risky as the overall firm. The project has an initial cash outflow of $2.5 million and annual cash inflows of $1.150,000 at the end of each year for three years. What is the NPV of the project?