1. You make a one year investment of $12,000 in Georges's House Painting Inc borrowing $5,000 of the money at 10%. If you expect to earn 24% on your investment under this arrangement, what rate of return would you expect to earn if you put up the entire $12,000 from your money? Ignore taxes
2. A company is considering a project that will be financed with debt and equity. The total investment is $500,000, of which $200,000 is financed with debt with an annual interest rate of 10%. The EBIT is $100,000 every year, in perpetuity. The tax rate is 30% and the project's WACC is 15% p.a. Find the NPV of this project. (As we did in class, assume that annual depreciation equals the annual investment in fixed assets and other non-operational cash flows.)
3. Suppose that a company with total assets of $1,000 pays a corporate tax rate of 30%, and that its bankruptcy cost function is given by k(D) = 0.0005D2. What is the optimal debt-to-asset ratio, D/A, for this company?
4. The book value of a firm's equity is $500,000, but the market value of that equity is $700,000. The firm's debt has a book and market value of $400,000. The corporate tax rate is 30% and the cost of debt is 11%, whereas the cost of equity is 16%. Find the firm's weighted average cost of capital (WACC).