finance 6 homework questions

Question 1

1. Given the following information (10 points):

interest rate 8%

tax rate 30%

dividend $1

price of the common stock $50

growth rate of dividends 7%

debt ratio 40%

a. Determine the firm's cost of capital.

b. If the debt ratio rises to 50 percent and the cost of funds remains the same, what is the new cost of capital?

c. If the debt ratio rises to 60 percent, the interest rate rises to 9 percent, and the price of the stock falls to $30, what is the cost of capital?

d. Why is this cost different?

Question 2

1. Estimating weighted cost of capital (5 points)

Assume the following percentage capital structure is considered optimal for this firm.

Debt .30

Preferred stock.10

Common equity.60

The firm has estimated the after tax cost of each source of funds. Debt costs .06, preferred stock .10, retained earnings .18 and common stock .22.The firm is operating under conditions of capital rationing and therefore will not sell new stock to the public.What is the weighted cost of capital for this firm?

Question 3

1. Calculate the following values for a project that requires an initial investment of $26,192 and has equal annual cash inflows of $8,000 each year for the next five years.Assume a cost of capital of 12%.You must show your work for full credit.(10 points)
a.Payback period

b.Net present value

c. Internal rate of return

Question 4

1. If you are evaluating mutually exclusive investments, it is possible that the net present value and the internal rate of return methods may not agree as to which of the investments is the most desirable.Explain fully two reasons why this might occur.(5 points)

Question 5

1. CCA ltd. has sales of $6,000 and the following balance sheet. (10 points)

Assets	Current	Forecasted	Liab. & Equity	Current	Forecasted
Cash	$100		Accounts payable	$900
Accounts rec.	600		Long term debt	1050
Inventory	1200		Equity	1950
Plant	2000
Total	3900		Total	3900

Assume that all current assets and current liabilities change with sales and that sales are expected to grow to $8,000.

a.Use the percent of sales forecasting method to forecast these values and enter them in the forecast column of the balance sheet above.

b.The net profit margin (what the firm earns on sales) is 8%.Forecast the new level of equity and enter it in the forecast column of the balance sheet above.

c.Complete the balance sheet.Does the firm require additional external financing hint EFR calculation)?If so, how much?

Question 6

1. Use the data in the following table to compute the percentage change in EBIT that would occur if sales were to increase by10%. (5 points)

Sales$500,000

Less Variable cost 200,000

Less Fixed cost 250,000

EBIT 50,000

Less interest 20,000

Profit before tax 30,000

Less tax 12,000

Net Profit 18,000