AQ&Q has EBIT of $2 million, total assets of $10 million, stockholders’ equity of $4 million, and pretax interest expense of 10 percent.

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limra
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  • Field: Business & Finance
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1. Find the NPV and PI of a project that costs $1,500 and returns $800 in year one and $850 in year two. Assume the project’s cost of capital is 8 percent.

 

5. For the following projects, compute NPV, IRR, MIRR, profitability index, and payback. If these projects are mutually exclusive, which one(s) should be done? If they are independent, which one(s) should be undertaken?

i. A B C D

Year 0 –1,000 –1,500 –500 –2,000

Year 1 400 500 100 600

Year 2 400 500 300 800

Year 3 400 700 250 200

Year 4 400 200 200 300

Discount rate 10% 12% 15% 8%

 

1. AQ&Q has EBIT of $2 million, total assets of $10 million, stockholders’ equity of $4 million, and pretax interest expense of 10 percent.

a. What is AQ&Q’s indifference level of EBIT?

b. Given its current situation, might it benefit from increasing or decreasing its use of debt? Explain.

c. Suppose we are told AQ&Q’s average tax rate is 40 percent. How does this affect your answers to (a) and (b)?

9. The following are balance sheets for the Genatron Manufacturing Corporation for the years 2010 and 2011:

BALANCE SHEET 2010 2011

Cash $50,000 $40,000

Accounts receivable 200,000 260,000

Inventory 450,000 500,000

Total current assets 700,000 800,000

Fixed assets (net) 300,000 400,000

Total assets $1,000,000 $1,200,000

Bank loan, 10% $90,000 $90,000

Accounts payable 130,000 170,000

Accruals 50,000 70,000

Total current liabilities $270,000 $330,000

Long-term debt, 12% 300,000 400,000

Common stock, $10 par 300,000 300,000

Capital surplus 50,000 50,000

Retained earnings 80,000 120,000

Total liabilities and equity $1,000,000 $1,200,000

a. Calculate the weighted average cost of capital based on book value weights. Assume an after-tax cost of new debt of 8.63 percent and a cost of common equity of 16.5 percent.

b. The current market value of Genatron’s long-term debt is $350,000. The common stock price is $20 per share and there are 30,000 shares outstanding. Calculate the WACC using market value weights and the component capital costs in (a).

c. Recalculate the WACC based on both book value and market value weights assuming that the before-tax cost of debt will be 18 percent, the company is in the 40 percent income tax bracket, and the after-tax cost of common equity capital is 21 percent.

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