Please help me with the following questions (I'd like to see the calculation steps and answers)
34. Wagner Inc estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?
Project A is of average risk and has a return of 9%.
Project B is of below-average risk and has a return of 8.5%.
Project C is of above-average risk and has a return of 11%
None of the projects should be accepted.
This is because the WACC of below-risk projects is 8%, and the return on project B is 8.5% which means that it has a higher return than the required return therefore it should be accepted.
45. A stock that currently trades for $40 per share is expected to pay a year-end dividend of $2 per share. The dividend is expected to grow at a constant rate over time. The stock has a beta of 1.2, the risk-free rate is 5%, and the market risk premium is 5%. What is the stock’s expected price seven years from today?
Step 1: Calculate the required rate of return using CAPM
r= risk free rate + beta x market risk premium = 5% + 1.2 x 5%= 11.00%
Step 2: Calculate the growth rate of dividends using dividend discount model with constant growth
Po= Div1/ (r-g)
Dividend for next year= Div1 = $2.00
Cost of equity= r= 11.00% (calculated)
growth rate of dividends/earnings= g= ? To be calculated
Current stock price= Po= $40.00
Plugging in the values:
g= 6.% =11.%-2/40
Step 3: Calculate the stock price seven years from now
The stock price will increase at the rate of g= 6.%
Stock price= $40 x (1+0.06)^7= $60.15
46.The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000, is expected to last for 10 years and produces after-tax cash flows, including depreciation, of $44,503 per year. If the firm’s WACC is 14% and its tax rate is 40%, what is the project’s IRR?
18%
Please see the attached excel sheet
47. Maxvill Motors has annual sales of $15,000. Its variable costs equal 60% of its sales, and its fixed costs equal $1,000. If the company’s sales increase 10%, what will be the percentage increase in the company’s earnings before interest and taxes (EBIT)?
Sales = $15,000
Less Variable Costs @ 60% = $9,000 =0.6x15000
Contribution= $6,000 =15000-9000
Less Fixed Costs= $1,000
EBIT= $5,000 =6000-1000
Degree of operating leverage (DOL):
DOL= (Sales - Variable Costs)/ EBIT= 1.2 =$6,000 / $5,000
DOL = % change in EBIT/ % change in sales= 1.2
Sales increase by 10%
Therefore EBIT increases by 12% =1.2 x $10.%
Answer: EBIT increases by 12%
49. Cleveland Corporation has 100,000 shares of common stock outstanding, its net income is $750,000, and its P/E is 8. What is the company’s stock price?
EPS = $750,000/100,000
= $7.50.
P/E = Price/EPS
= 8.
Therefore:
Price = 8 x $7.50
= $60.00.
50. S. Claus & Co. is planning a zero coupon bond issue that has a par value of $1,000 and matures in 2 years. The bonds will be sold today at a price of $826.45. If the firm’s marginal tax rate is 40%, what is the annual after-tax cost of debt to the company on this issue?
Pre tax cost of debt= ($1000/$826.45)^(1/2)-1= 10.00%
Marginal Tax rate T = 40%
Pre tax cost of debt= kd= 10.00%
Aftertax cost of debt= kd(1-T)= 6.00% =(100% -40.%)*10.%
Answer: 6.00%