# Fin500 case 3 assignment

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 companyâs 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
companyâs tax rate is 40%. (3) The
risk-free rate is 4.50%, the market risk premium is 5.50%, and the stockâs 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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