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Solve the Following 7 Questions.

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6. Palencia Paints Corporation has a target capital structure of 25% debt and 75% common equity, with no preferred stock. Its before-tax cost of debt is 10%, and its marginal tax rate is 25%. The current stock price is P0 = $24.50. The last dividend was D0 = $2.25, and it is expected to grow at a 7% constant rate. What is its cost of common equity and its WACC? Do not round intermediate calculations. Round your answers to two decimal places.

rs = %

WACC = %

10. Kahn Inc. has a target capital structure of 40% common equity and 60% debt to fund its $9 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 15%, a before-tax cost of debt of 8%, and a tax rate of 25%. The company’s retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $4, and the current stock price is $31.

  1. What is the company’s expected growth rate? Do not round intermediate calculations. Round your answer to two decimal places. %
  2. If the firm’s net income is expected to be $1.9 billion, what portion of its net income is the firm expected to pay out as dividends? Do not round intermediate calculations. Round your answer to two decimal places. (Hint: Refer to Equation below.)Growth rate = (1 – Payout ratio)ROE

13. Project L requires an initial outlay at t = 0 of $50,000, its expected cash inflows are $13,000 per year for 9 years, and its WACC is 13%. What is the project’s MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

%

14. Project L requires an initial outlay at t = 0 of $74,000, its expected cash inflows are $13,000 per year for 11 years, and its WACC is 10%. What is the project’s payback? Round your answer to two decimal places.

years

18. An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $11.6 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $13.92 million. Under Plan B, cash flows would be $2.0612 million per year for 20 years. The firm’s WACC is 12.9%.

  1. Construct NPV profiles for Plans A and B. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. If an amount is zero, enter “0”. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.
    Discount Rate NPV Plan A NPV Plan B
    0 % $ million $ million
    5 million million
    10 million million
    12 million million
    15 million million
    17 million million
    20 million million

    Identify each project’s IRR. Do not round intermediate calculations. Round your answers to two decimal places. Project A: % Project B: % Find the crossover rate. Do not round intermediate calculations. Round your answer to two decimal places. %

  2. Is it logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12.9%? YES or NO
  3. If all available projects with returns greater than 12.9% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12.9%, because all the company can do with these cash flows is to replace money that has a cost of 12.9%? YES or NO
  4. Does this imply that the WACC is the correct reinvestment rate assumption for a project’s cash flows? YES or NO

19. A store has 5 years remaining on its lease in a mall. Rent is $2,000 per month, 60 payments remain, and the next payment is due in 1 month. The mall’s owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a “great deal” (owner’s words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,700 per month for the next 51 months. The lease cannot be broken, and the store’s WACC is 12% (or 1% per month).

  1. Should the new lease be accepted? (Hint: Be sure to use 1% per month.) YES or NO
  2. If the store owner decided to bargain with the mall’s owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and old leases? (Hint: Find FV of the old lease’s original cost at t = 9; then treat this as the PV of a 51-period annuity whose payments represent the rent during months 10 to 60.) Do not round intermediate calculations. Round your answer to the nearest cent.$
  3. The store owner is not sure of the 12% WACC—it could be higher or lower. At what nominal WACC would the store owner be indifferent between the two leases? (Hint: Calculate the differences between the two payment streams; then find its IRR.) Do not round intermediate calculations. Round your answer to two decimal places. %

20. A project has annual cash flows of $5,000 for the next 10 years and then $9,500 each year for the following 10 years. The IRR of this 20-year project is 12.18%. If the firm’s WACC is 9%, what is the project’s NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

$

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