Cost of capital, weighted avareage cost, cash flow, marginal cost
Please refer to Practice sheet (attachment) to help relate and answer the following questions.
1. Explain the relationship between risk and return for investors. Using spreadsheet software, calculate NPV, IRR, and the present value of cash flows associated with an investment project.
Complete an exercise to calculate the NPV and IRR for various project cash flows. You should correctly calculate NPV and IRR for 60% of these measures to be considered minimally proficient.
2. Calculate the cost of capital by using CAPM and WACC.
Complete an exercise to calculate the WACC. The exercise will include costs for long term debt and common and preferred stock. In addition, the securities will include flotation costs for new issues. You must correctly identify the weights of each of the capital components, the costs of each component, and the marginal cost of capital.
3. Given the following information, calculate the weighted average cost of capital for Hamilton Corp. Line up the calculation in the order show in Table 11-1.
Percent of capital structure:
Debt……………………………….. 35%
Preferred yield to maturity…………20%
Common equity…………………….45%
Additional information:
Bond coupon rate…………………………11%
Bond yield to maturity……………………9%
Dividend, expected common……………..$ 5.00
Dividend, preferred……………………….$ 12.00
Price, common…………………………….$ 60.00
Price, preferred…………………………….$ 106.00
Flotation cost, preferred…………………..$ 4.50
Growth rate………………………………..6%
Corporation tax rate……………………….35%
4. Assume a $40,000 investment and the following cash flows for two alternatives.
Year Investment X Investment Y
1 $6000 $15000
2 $8000 $20000
3 $9000 $10000
4 $17000 ?
5 $20000 ?
5. You are asked to evaluate the following two projects for the Norton Corporation. Using the net present value method combined with the profitability index approach, which project would you select? Use a discount rate of 14 percent.
a) Project X (Videotapes of the Weather Report)
($20,000 Investment)
Year Cash Flow
1 $10000
2 8000
3 9000
4 8600
b) Project Y (Slow-Motion Replays of Commercials)
($40,000 Investment)
Year Cash Flow
1 $20000
2 $13000
3 $14000
4 $16000
6. Sampson Corp, is evaluating the introduction of a new product. The possible levels of unit sales and the probabilities of their occurrence are shown next:
Possible Market Reaction Sales in Units Probabilities
Low response 30 .10
Moderate response 50 .20
High response 75 .40
Very high response 90 .30
a) What is the expected value of unit sales for the new product?
b) What is the standard deviation of unit sales?
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