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1) A firm which subject to 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%?

i) 11.59%
ii) 12.31%
iii) 13.75%
iv) None of the above

2) You have to select between two investments. First investment needs you to pay 1,989,453 3 years from now, but it will make you cash flow every year from the second year to the sixth year; starting with 129,827 on second year and it will increase 5% per year for 3 years, plus, you will get back lump sum of 1,639,837 on sixth year. The 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 carry on until fifth year. Government bond rate stands at 2.3%. You can afford either investment, but can only select one. With NPV concept, which is the better investment for you, and how much is it better?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M914455

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