Problem 1) Company X is an all-equity firm (i.e. it has no debt financing) with a beta of 1.15. If the risk-free rate is 5% and the market risk premium is 9% (the expected return in the market is 14%), determine the cost of equity capital for Company X.
Problem 2) Nexel Online has a beta of 1.4 and has a debt-to-equity ratio of 0.75. (NOTE: D/E Ratio is not the same as weight of debt. From the D/E Ratio you need to calculate D/[D+E] and E/[D+E] to solve the problem correctly.) The expected return on the market is 13.0% and the risk-free rate is 6.0%. Apex can borrow additional funds at the current market interest rate of 9%. The corporate tax rate for Apex is 36%.
A. Calculate Nexel's cost of equity
B. Calculate Nexel's after-tax cost of debt
C. Calculate Nexel's weighted average cost of capital
Problem 3) Calculate the weighted average cost of capital for Premium Products given the following information:
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Market Value of Debt
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$600,000
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Market Value of Stock
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$900,000
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Cost of Debt
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9.5%
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Risk-free Rate
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5.0%
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Expected Market Return
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14.2%
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Beta for Allied Power
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1.2
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Corporate Income Tax Rate
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34.0%
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Problem 4) Calculate the weighted average cost of capital for Kirkland Products given the following information:
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Number of Shares Outstanding
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1,000,000
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Market Price per share
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$30.00
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Market Value of Debt
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$20,000,000
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Cost of Equity
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18.0%
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Cost of Debt
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9.5%
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Corporate Income Tax Rate
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34.0%
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Problem 5) Kirkland (the company from the previous problem) is considering a project that costs $750,000 & will generate after-tax cash flows of $320,000 at the end of year 1, $315,000 at the end of year 2, and $310,000 at the end of year 3. If the project is deemed to have the same risk as the overall firm, should Kirkland take the project and why or why not?