-Speedy Delivery Systems can buy a piece

of equipment that should provide an 6 percent return and can be financed at 3

percent with debt. The CEO likes earning more than the cost of debt, and he

thinks this would be a good deal. The firm can also buy a machine that would

yield a 14 percent return but would cost 16 percent to finance through common

equity. Earning less than the cost of equity sounds bad to the CEO. Assume

debt and common equity each represent 50 percent of the firmâs capital

structure.

(a)

Compute the weighted average cost of

capital. (Round your intermediate and final answers to 1 decimal place.

Omit the “%” sign in your response.)

Weighted average cost of

capital

%

(b)

Which project(s) should be accepted?

Piece of equipment should be financed.

New machine should be financed.

-United Business Formsâ capital structure

is as follows:

Debt

35

%

Preferred stock

30

Common equity

35

The aftertax cost of debt is 10 percent,

the cost of preferred stock is 13 percent, and the cost of common equity (in

the form of retained earnings) is 16 percent.

Calculate United Business Formsâ weighted

cost of each source of capital and the weighted average cost of capital. (Round

your answers to 2 decimal places. Omit the “%” sign in your

response.)

Weighted cost

Debt (Kd)

%

Preferred stock (Kp)

Common equity (Ke)

Weighted average cost of

capital (Ka)

%

-Assume a $260,000 investment and the

following cash flows for two products:

Year

Product X

Product Y

1

$

90,000

$

80,000

2

80,000

70,000

3

80,000

50,000

4

40,000

80,000

(a)

Calculate the payback for products X and

Y. (Round your answers to 2 decimal places.)

Payback period

Product X

years

Product Y

years

(b)

Which alternative would you select under

the payback method?

Product X

Product Y

-Hamilton Control Systems will invest

$99,000 in a temporary project that will generate the following cash inflows

for the next three years. Use .mhhe.com/connect/0073530727/Images/Appendix_B.jpg” title=”Appendix B”>Appendix B.

Year

Cash flow

1

$

37,000

2

34,000

3

95,000

The firm will also be required to spend

$18,000 to close down the project at the end of the three years.

(a)

Compute the net present value if the cost

of capital is 11 percent. (Round “PV Factor” to 3 decimal

places. Round your answer to the nearest dollar amount. Negative amount

should be indicated by a minus sign. Omit the “$” sign in your

response.)

Net present value

$

(b)

Should the investment be undertaken?

No

Yes

-Diaz Camera Company is considering two

investments, both of which cost $30,000. The cash flows are as follows:

Use .mhhe.com/connect/0073530727/Images/Appendix_B.jpg” title=”Appendix B”>Appendix B.

Year

Project A

Project B

1

$

15,000

$

14,000

2

15,000

14,000

3

6,000

11,000

(a-1)

Calculate the payback period for project

A and project B. (Round your answers to 2 decimal places.)

Payback period

Project A

years

Project B

years

(a-2)

Which of the two projects should be

chosen based on the payback method?

Project A

Project B

(b-1)

Calculate the net present value for

project A and project B. Assume a cost of capital of 8 percent. (Round

“PV Factor” to 3 decimal places, intermediate and final answers to

the nearest dollar amount. Omit the “$” sign in your response.)

Net present value

Project A

$

Project B

$

(b-2)

Which of the two projects should be

chosen based on the net present value method?

Project B

Project A

(c)

Should a firm normally have more

confidence in answer derived based on Net present value method or Payback

method?

Payback method

Net present value method

-Kingâs Department Store is contemplating

the purchase of a new machine at a cost of $28,552. The machine will provide

$4,600 per year in cash flow for 11 years. Kingâs has a cost of capital of 9

percent. Use .mhhe.com/connect/0073530727/Images/Appendix_D.JPG” title=”Appendix D”>Appendix D.

(a)

What is the internal rate of return? (Round

“PV Factor” to 3 decimal places. Round your answer to the nearest

whole percent. Omit the “%” sign in your response.)

Internal rate of return

%

(b)

Should the project be undertaken?

No

Yes

-Wildcat Oil Company was set up to take

large risks and is willing to take the greatest risk possible. Richmond

Construction Company is more typical of the average corporation and is

risk-averse.

Projects

Returns:

Expected value

Standard

deviation

A

$

320,000

$

149,000

B

693,000

435,000

C

187,000

152,000

D

145,000

234,000

(a-1)

Compute the coefficients of variation. (Round

your answers to 3 decimal places.)

Coefficient of

variation

Project A

Project B

Project C

Project D

(a-2)

Which of the following four projects

should Wildcat Oil Company choose?

Project A

Project B

Project C

Project D

(b)

Which one of the four projects should

Richmond Construction Company choose based on the same criteria of using the

coefficient of variation?

Project A

Project B

Project C

Project D

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