This

case assignment is focused on Bond valuation and stock valuation concepts and

procedures.

1.

You were hired as a consultant to Quigley Company, whose target

capital structure is 35% debt, 10% preferred, and 55% common equity. The interest

rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of

common from retained earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new common

stock. What is Quigley’s WACC?

2.

You were recently hired by Scheuer Media Inc. to estimate its

cost of common equity. You obtained the

following data: D1 = $1.75; P0

= $42.50; g = 7.00% (constant); and F = 5.00%.

What is the cost of equity raised by selling new common stock?

3.

S. Bouchard and Company hired you as a consultant to help

estimate its cost of common equity. You

have obtained the following data: D0

= $0.85; P0 = $22.00; and g = 6.00% (constant). The CEO thinks, however, that the stock price

is temporarily depressed, and that it will soon rise to $40.00. Based on the DCF approach, by how much would

the cost of common from retained earnings change if the stock price changes as

the CEO expects?

4.

Bolster Foodsâ (BF) balance sheet shows a total of $25 million

long-term debt with a coupon rate of 8.50%.

The yield to maturity on this debt is 8.00%, and the debt has a total

current market value of $27 million. The

balance sheet also shows that the company has 10 million shares of stock, and

the stock has a book value per share of $5.00.

The current stock price is $20.00 per share, and stockholders’ required

rate of return, rs, is 12.25%.

The company recently decided that its target capital structure should

have 35% debt, with the balance being common equity. The tax rate is 40%. Calculate WACCs based on book, market, and

target capital structures.

5.

Daves Inc. recently hired you as a consultant to estimate the companyâs WACC. You have obtained the following

information. (1) The firm’s noncallable

bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000,

and a market price of $1,050.00. (2) The

companyâs tax rate is 40%. (3) The

risk-free rate is 4.50%, the market risk premium is 5.50%, and the stockâs beta

is 1.20. (4) The target capital

structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost

of common stock, and it does not expect to issue any new shares. What is its WACC?

6.

Current Design Co. is considering two mutually exclusive, equally

risky, and not repeatable projects, S and L. Their cash flows are shown below.

The CEO believes the IRR is the best selection criterion, while the CFO

advocates the NPV. If the decision is made by choosing the project with the

higher IRR rather than the one with the higher NPV, how much, if any, value

will be forgone, i.e., what’s the chosen NPV versus the maximum possible NPV?

Note that (1) “true value” is measured by NPV, and (2) under some

conditions the choice of IRR vs. NPV will have no effect on the value gained or

lost.

WACC:

7.50%

Year

0

1

2

3

4

CFS

-$1,100

$550

$600

$100

$100

CFL

-$2,700

$650

$725

$800

$1,400

7.

Projects S and L, whose cash flows are shown below, are mutually

exclusive, equally risky, and not repeatable. Hooper Inc. is considering which

of these two projects to undertake. If the decision is made by choosing the

project with the higher IRR, how much value will be forgone? Note that under

certain conditions choosing projects on the basis of the IRR will not cause any

value to be lost because the project with the higher IRR will also have the

higher NPV, so no value will be lost if the IRR method is used.

WACC:

10.25%

Year

0

1

2

3

4

CFS

-$2,050

$750

$760

$770

$780

CFL

-$4,300

$1,500

$1,518

$1,536

$1,554

8.

Shannon Co. is considering a project that has the following cash

flow and WACC data. What is the project’s discounted payback?

WACC:

10.00%

Year

0

1

2

3

4

Cash

flows

-$950

$525

$485

$445

$405

9.

Westwood Painting Co. is considering a project that has the

following cash flow and WACC data. What is the project’s MIRR? Note that a

project’s MIRR can be less than the WACC (and even negative), in which case it

will be rejected.

WACC:

12.25%

Year

0

1

2

3

4

Cash

flows

-$850

$300

$320

$340

$360

10. Last

month, Standard Systems analyzed the project whose cash flows are shown below.

However, before the decision to accept or reject the project took place, the

Federal Reserve changed interest rates and therefore the firm’s WACC. The Fed’s

action did not affect the forecasted cash flows. By how much did the change in

the WACC affect the project’s forecasted NPV? Note that a project’s expected

NPV can be negative, in which case it should be rejected.

Old

WACC:

10.00%

New

WACC:

11.25%

Year

0

1

2

3

Cash flows

-$1,000

$410

$410

$410

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