1. You have invested $4,500 in an account that earns 8% compounded semi-annually.
You plan on making additional payments of $75 per month into this account for the
next five years. How much will your investment be worth in 5 years?
2. You plan on buying a bottling machine for $2 million, which can be salvaged for
$400,000 in 8 years. Your tax rate is 43% and the CCA rate is 30%. Your cost of
capital is 13%. What is present value of the CCA tax sheild?
3. You have the following two bonds that are identical except for coupon rate and price.
What is the price of bond B?.
Bond A Bond B
Price $937.69 ?
Years to maturity 10 10
Coupon rate (semi-annual) 9% 8%
Face Value $1000 $1000
1 4. You have the following information on the following stock.
r = 12%
EPS 0 $2.2
What is the dividend payout ratio?
5. Your firm is financed by 40% equity and 60% debt. The cost of equity is16% and the
cost of debt is 7%. Your corporate tax rate is 37%. What is your weighted average
cost of capital (WACC)?
6. You need to finance a project that will cost $17 million. The floatation costs on
raising the funds are 6%. How much money do you need to rise to be able to afford
7. Duff Beer’s WACC is 10.8504%. Duff’s cost of equity is 17%, and their cost of debt
is 9%. If Duff’s debt to equity ratio is 1.3, what is Duff’s tax rate?
2 Use the following information for questions 8-11. Megalo-Mart is financed by 2
classes of equity and one class of debt. Class A equity just paid a dividend of $1.45
which is expected to grow at 2.75% perpetually, and is priced at $13.24. Class B
equity returns have a covariance with the market returns of 0.04125. The risk free rate
is 4%, the expected return on the market is 12% and the variance of market returns is
3.75%. The debt has 20 years to maturity, with a coupon rate of 8% paid annually, a
face value of $1000 and is selling at 95% of par. The debt to equity ratio is 0.8 and
the class B equity has twice the value of the class A equity. The tax rate is 37%. The
floatation costs of debt equal 3% and the floatation costs of both classes of equity is
5.5%. Megalo-Mart is planning to purchase a propane pump that costs $2 million
8. What is the cost of the class A equity?
9. What is the cost of the class B equity?
10. What is the WACC?
11. How much does Megalo-Mart need to raise to purchase the propane pump?
b. $2, 220.381.55
3 12. Mr. Van Driesen is trying to decide whether or not to buy or lease a computerized
grading system for his class. He can buy it for $12,000 or lease it for $1800 per year
for the next five years. He can get the funds for the lease, by borrowing at 8% from
the schools line of credit. The grader has no salvage value and fits into the 25% CCA
bracket. The tax rate is 33%. What is the NAL?
Use the following information for questions 13-16. You are looking at purchasing a
widget producing machine that will cost $11 million which will be salvageable in 9
years for $3 million. The machine will increase revenues by $7.5 million per year and
will fall into the 30% CCA bracket. You can lease the machine for $2.75 million per
year. Your pre-tax cost of debt is 8.5%. Your corporate tax rate is 35%.
13. What is the present value of the CCA tax shield?
14. What is the NPV of the purchase?
a. $25, 421,228
15. What is the net advantage to leasing (NAL)?
4 16. What would the pre-tax lease payment have to be for you to be indifferent between
leasing or buying?