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1) 10 A firm that is subject to the 40% tax rate has debt of $60M, equity of $140M, and no preferred stock. Determine the firm's cost of capital (WACC) if its pre-tax cost of new debt is 12%, the pre-tax cost of its old debt is 8%, and its cost of equity is 14.5%?

2) You have to select between two investments. First investment needs you to pay 1,989,453 three years from now, but it will earn you cash flow every year from the second year to 6th year; starting with 129,827 on 2nd year and it will rise 5% per year for three years, plus, you'll get back the lump sum of 1,639,837 on sixth year. 2nd investment needs you to pay only 1,873,963 today, and then you will earn 423, 296 beginning 1 year from now and this will continue until the 5th year. Government bond rate stands at 2.3%. You can afford either investment, but can only select one. With NPV concept, which is a better investment for you, and how much is it better?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M914392

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