MGT 325  FINANCE FOR MANAGERS
Name  Date 
INSTRUCTIONS: Please complete this examination and bring it to class on the due date indicated on the syllabus. Remember this shall be an individual effort, and you shall not give or receive assistance in the completion of this examination. Please show all work, and feel free to attach additional pages as necessary. Full credit will not be given for providing only an answer, even if the answer is correct.
1.
Compute the average cost of debt for a corporation whose longterm debt consists of the following:
Bonds ($1,000 face value, semiannual coupon payments)  
Type  Amount Outstanding  Coupon Rate  Prevailing Rate  Years to Maturity 
Mortgage Bonds  $170,000,000  6.00%  5.00%  25 
Debentures  $ 50,000,000  9.25%  10.00%  5 
Subordinated Debentures  $ 12,000,000  9.00%  10.50%  4 
Convertible Bonds  $ 8,000,000  8.25%  7.75%  10 
At a marginal tax rate of 40%, what would be theaftertax weighted average cost of its debt? (20 points possible)
2.
The longterm debt of Bayboro Industries, Inc. consists of bonds with an average cost of 7.5% and term loans. If the firm’s tax rate is 40%, and bonds comprise 74% of total longterm debt, what would be the average cost of the term loans if the weighted average aftertax cost of debt is 4.578%? (10 points possible)
3.
Consolidated Frooble, Inc. has an issue of cumulative preferred stock paying an 11.5% annual dividend. If the issue had a 7% flotation cost and a $100 par value, calculate its capital component cost. Why isthe capital component cost of the preferred stock different from the annual dividend rate? HINT: An answer that merely states the flotation cost is the reason the cost of the preferred stock is different from the annual dividend rate is not a sufficiently detailed answer. (10 points possible)
4.
The Potable Ethanol Corporation uses the Capital Asset Pricing Model (CAPM) to compute its cost of existing common equity. If the firm computes its common equity cost at 21.30% using the CAPM and estimates the riskfree rate is 1.5%, what value does the firm use for returns in the stock market if the firm’s beta coefficient is 1.5? (15 points possible)
5.
A firm has a capital structure consisting of 60% longterm debt at an average cost of 9.8%, 5% preferred equity at a cost of 10.5% and 35% common equity having an average cost of 15.5%. If the firm's marginal tax rate is 40%, what would be the firm’s weighted average cost of capital (WACC)? (10 points possible)
6.
Cockroach Bay Mining is contemplating investment in new technology for processing phosphate rock. The operations manager reports the cost to purchase and install the new machinery will be $75,500,225. He estimates the equipment will produce $5,000,000 in annual savings over its 40 year life. Compute thepayback period in years and the Net Present Value of this investment. (10 points possible)
7.
Evaluate the capital project below. Your firm has a hurdle rate of 15.75% for capital projects of this type. The initial outlay for the project is $65,500,000 and the project is expected to generate the following cash flows over its 15 year life:
Year  Cash Flow  Year  Cash Flow  Year  Cash Flow 
1  $2,100,000  6  $4,600,000  11  $5,900,000 
2  $3,500,000  7  $4,350,000  12  $6,000,000 
3  $3,750,000  8  $5,000,000  13  $6,300,000 
4  $4,250,000  9  $5,700,000  14  $6,250,000 
5  $4,500,000  10  $5,500,000  15  $6,500,000 
For the project, compute the payback period in years, the Net Present Value (NPV) and the Internal Rate of Return (IRR). Prepare asuccinctsummary of your findings and recommendation. (25 points possible)

Rating:
5/
Solution: MGT 325  FINANCE FOR MANAGERS