Controllership
Directions: Answer both questions. Please submit your work in Word only. Please be sure to document any source you use.
Question #1
a) Given the following information, calculate the firm's WACC:
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Tax rate:
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30%
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Debt rate:
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6%
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Preferred stock dividend rate:
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10% of $100 par value
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Risk-free rate of return:
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2%
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Market rate of return:
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14%
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Stock beta:
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1.2
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Debt value:
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$25,000,000
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P/S value:
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$5,000,000
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C/S value:
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$20,000,000
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b) What would a firm use the WACC for?
Question #2
Consider the following potential investment, which has the same risk as a firm's other projects:
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Time
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Cash Flow
|
|
0
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-$180,000
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|
1
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$46,000
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2
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$52,000
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3
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$52,000
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4
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$58,000
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5
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$65,000
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a) What are the investment's payback period, IRR, and NPV, assuming the firm's WACC is 9%?
b) If the firm requires a payback period of less than 4 years, should this project be accepted? Be sure to justify your choice.
c) Based on the IRR and NPV rules, should this project be accepted? Be sure to justify your choice.
d) Which of the decision rules (payback, NPV, or IRR) do you think is the best rule for a firm to use when evaluating projects? Be sure to justify your choice.