d0 2.

75
growth 0.058
stock sells 59

R 10.73%
beta 1.2
risk free rate 0.048
market return 0.11

cost of capital 12.24%

T-bills 0.045
beta 1.1
market risk premium 0.07
recent dividend 1.7
dividend growth 0.06
stock sells @ 39

CAPM 12.20%
Divident Growth Model 10.62%

Averaging the 2 11.41%

D0 (Now) 1.69
D1 1.35
D2 1.43
D3 1.5 5.78%
D4 1.61 $ 1.7876
Stock sells 50

g1 5.93%
g2 4.90%
g3 7.33%
g4 4.97%

Avg. Growth 5.78%

Next Div. $ 1.7877

Arithmatic Avg. 9.36%

Geometric Avg. 9.35%
Face Value 1000
Years 18
Period 36
quoted face value 1.07
Price -1070
semiannual payments 2
Coupon Rate 0.06
Coupon 30
tax rate 0.35

YTM (rate) 5.39%

YTM (rate -->tax) 3.50%
year bond 30
% bond 0.08
semiannual 2
years ago 3
face value 1000
% of selling at 0.93
Selling at 930
tax rate 0.35
book value of debt issued 60,000,000.00
years left to maturity 10
book value of this issue 35,000,000
PAR 1,000
Bond % par 0.57
New Bond Price 570

companys total book value of debt 95,000,000.00

companys total market value of debt 75,750,000.00
cost of debt before tax 8.60%
after-tax cost of debt 5.59%
shares outstanding 8,000,000 1
current price 73 Equity/Value
book value per share 7 Debt/Value
1st bond issue (face value) 85,000,000
1bi (percent coupon) 0.07 2
Coupon 70 Equity/Value
1bi (% of par) 0.97 Debt/Value
New Price 970
2nd bond issue (face value) 50,000,000 Which are more relevant, the bo
2bi (percent coupon) 0.08 Market Value
Coupon 80 Book Value
2bi (% of par) 1.08
New Price 1080
1bi matures in (years) 21
2bi matures in (years) 6
 29.32%
70.68%

81.06%
18.94%

are more relevant, the book or market value weights?

. Pretty sure its book value weights

shares outstanding 8,000,000
current price 73
book value per share 7
1st bond issue (face value) 85,000,000
1bi (percent coupon) 0.07
Coupon 70
1bi (% of par) 0.97
New Price 970
2nd bond issue (face value) 50,000,000
2bi (percent coupon) 0.08
Coupon 80
2bi (% of par) 1.08
New Price 1080
1bi matures in (years) 21
2bi matures in (years) 6
d0 4.1
dividend growth rate 0.06
payments (semiannual=2) 2
tax rate 0.35

cost of equity 11.95%

Market value of equity 584,000,000.00
Total market value of debt 136,450,000.00
Weight of Debt 1 0.60
Weight of Debt 2 0.40
pre tax cost of debt B1 7.28%
pre tax cost of debt B2 6.35%
weighted pretax cost of debt 6.92%
denominator (tmvoc) 720,450,000.00
weight of equity 81.06%
weight of debt 18.94%

WACC 10.54%
tax rate 0.35
bonds outstanding 8000
% coupon bond 0.065
Coupon 65
par value 1000
years to maturity 25
selling % par 1.06
New price 1060
semiannual payments 2
common stock outstanding 310000
selling @ 57
beta 1.05
preferred outstanding 15000
preferred % 0.04
selling @ 72
market risk premium 0.07
risk free rate 0.045
preferred par value stock 100

semi annual cost of debt 3.02%

after tax annual cost of debt 3.92%
cost of equity 11.85%
cost of preffered stock 5.56%
Total Finance 27230000
Weight of debt 31.14%
Weight of equity 64.89%
Weight of preferred stock 3.97%

WACC 9.13%
project beta irr
w 0.6 0.088
x 0.85 0.095
y 1.15 0.119
z 1.45 0.15

T bill 4% Market 11%

A
Exp R for W 0.082 LOWER
Exp R for X 0.0995 LOWER
Exp R for Y 0.1205 HIGHER
Exp R for Z 0.1415 HIGHER

Expected
B Return irr
w 0.082 0.088 ACCEPT
x 0.0995 0.095 REJECT
y 0.1205 0.119 REJECT
z 0.1415 0.15 ACCEPT

Expected
C Return irr Hurdle Rate
w 0.082 0.088 11% CORRECTLY REJECTED
x 0.0995 0.095 11% CORRECTLY REJECTED
y 0.1205 0.119 11% CORRECTLY ACCEPTED
z 0.1415 0.15 11% CORRECTLY ACCEPTED
aftertax cash savings 1,800,000 1.74mill
savings growth 0.02 1%
debt equity ratio 0.8 0.75
cost of equity 0.12 11.40%
aftertax cost of debt 0.048 4.20%
adjustment factor 0.02 2%

firms cost of capital 8.80%

cost of capital for this project 10.80%
value of project $ 20,454,545
project cost 14,000,000
flotation costs 725,000
equity flotation cost 0.07
debt flotation cost 0.03

true cost 14,725,000

weighted avg. flotation costs 4.92%
debt equity ratio 1.0794
bond coupon rate price quote PQ (ratio) maturity
1 0.06 105.86 1.0586 5
2 0.075 114.52 1.1452 8
3 0.072 113.07 1.1307 15.5
4 0.068 102.31 1.0231 25

corporate tax rate semiannual 2

0.34

mv b1 42344000 w1 0.2162951839
mv b2 40082000 w2 0.2047407793
mv b3 62188500 w3 0.3176618421
mv b4 51155000 w4 0.2613021947
TMV 195769500 1

FV coupon rate coupon period

Bond 1 40,000,000 6.00% 1,200,000 10
Bond 2 35,000,000 7.50% 1,312,500 16
Bond 3 55,000,000 7.20% 1,980,000 31
Bond 4 50,000,000 6.80% 1,700,000 50

YTM*weight
1.0106%
1.0756%
1.8747%
1.7272%
Before tax cod 5.6881%
after tax cod 3.75% cod = cost of debt
 face value
40,000,000
35,000,000
55,000,000
50,000,000

Quote % market value YTM (RATE)

105.86% 42,344,000 4.67%
114.52% 40,082,000 5.25%
113.07% 62,188,500 5.90%
102.31% 51,155,000 6.61%

= cost of debt
debt-equity ratio 0.9 1.2
new plant building cost 110,000,000 145 mill
equity flotation cost 0.08 0.08
debt flotation cost 0.035 0.035
equity externally 1 1
retained earnings % 0.6 0.6
retained earnings % 1 1

initial cash flow 6,455,263

2a 1.90 2.2
2b 57,894,737 65.19M
2c 52,105,263.16 79.09M
2d 23,157,895 26.36M
initial cash flow 3,676,316
initial cash flow 1,823,684
land bought at 4,500,000
land appraised at 5,300,000
aftertax value of land 5,700,000
plant equipment cost 32,000,000
DEBT
# of bonds outstanding 230,000
coupon % 0.072
coupon 36
years to maturity 25
% of par 1.08
par 1000
new par price 1080
semiannual payments 2
COMMON STOCK
shares outstanding 8,800,000
selling @ 71
beta 1.1
PREFERRED STOCK
shares outstanding 450,000
% 0.05
new price 5
selling @ 81
MARKET
market risk premium 0.07
risk free rate 0.05
DEI common stock 0.08
DEI preferred stock 0.06
DEI debt 0.04
DEI tax rate 0.35
adjustment factor 0.02
initial NWC investment 1,300,000
tax life 8
# of years in project 5
equipment can be scrapped for 4,500,000
RDS cost 10,800
annual fixed cost 6,800,000
Variable production costs 9,400
planned # to manufacture 17,000

Market value of equity 624,800,000

Market value of deby 248,400,000
Market value of preferred stock 36,450,000
Value of firm 909,650,000
Return on equity 12.70%
cost of debt (rate - annual) 6.55%
after tax cost of debt 4.25%
cost of preferred stock 6.17%
Cash flow at time zero (1) 6.83%
Cash flow at time zero (2) 34,344,924
Cash flow at time zero (3) - 41,040,187
WACC 10.13%
discount rate 12.13%
annual depreciation 4,000,000
Book Value 12,000,000
after tax salvage value 7,125,000
annual operating cash flow 12,450,000
Accounting break even quantity 7714
NPV $10,398,766.12
IRR 21.84%

Year Cash Flow

0- 41,040,187
1 12,450,000
2 12,450,000
3 12,450,000
4 12,450,000
5 26,575,000

0
bought land 5,000,000
land sold today 5,300,000
new plant cost 12,500,000
grading costs 770,000

cash flow amount 18,570,000

sell per year 30,000
sell @ 68,000
luxury sell per year 12,000
sell @ 105,000
new port camper 25,000
sell @ 14,000
boost reg by 2,400
decrease luxury by 1,100

Annual Sales 397,700,000

Asset cost 640,000
tax life 8
project years 5
end of project price 175,000
tax rate 0.35

book value after 5 years 240000

after-tax cash flow 197,750
particulars Year 0 Year 1
initial investment -2,700,000
NWC -300,000

sales 2,080,000.00
less: cost 775,000.00
less: depreciation 900,000.00
earnings before tax 405,000.00
less: tax @ 35% 141,750.00
net income 263,250.00
add: depreciation 900,000.00
add: NWC
Add: after tax salvage value
operating cash flow - 3,000,000.00 1,163,250.00
pv factors @ 12% 1 0.8928571429
present values -3000000 1,038,616.07

Net present value 104,622.30

Year 2 Year 3 project life
initial investment
tax life
salvage value after tax life
2,080,000.00 2,080,000.00 generated annual sales
775,000.00 775,000.00 costs
900,000.00 900,000.00 NWC investment
405,000.00 405,000.00 fixed assets value @ end of project
141,750.00 141,750.00 tax rate
263,250.00 263,250.00 Required Return
900,000.00 900,000.00
300,000.00
136,500.00
1,163,250.00 1,599,750.00
0.7971938776 0.7117802478
927,335.78 1,138,670.45
 3
2,700,000
3
0
2,080,000
775,000
300,000
210,000
35%
12%
particulars Year 0 Year 1 Year 2
initial investment -2,700,000
NWC -300,000

sales 2,080,000.00 2,080,000.00

less: cost 775,000.00 775,000.00
less: depreciation 899,910.00 1,200,150.00
earnings before tax 405,090.00 104,850.00
less: tax @ 35% 141,781.50 36,697.50
net income 263,308.50 68,152.50
add: depreciation 899,910.00 1,200,150.00
add: NWC
Add: after tax salvage value
operating cash flow - 3,000,000.00 1,163,218.50 1,268,302.50
pv factors @ 12% 1 0.8928571429 0.7971938776
present values -3000000 1,038,587.95 1,011,082.99
Net present value 113,589.51
MACRS
Year Three year
1 0.3333
2 0.4445
3 0.1481
4 0.0741
Year 3 project life 3
initial investmen 2,700,000
tax life 3
salvage value afte 0
2,080,000.00 generated annual 2,080,000
775,000.00 costs 775,000
399,870.00 NWC investment 300,000
905,130.00 fixed assets valu 210,000
316,795.50 tax rate 35%
588,334.50 Required Return 12%
399,870.00
300,000.00
136,500.00
1,494,729.00
0.7117802478
1,063,918.58