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# Name Take Home Portion Test 3 FNCE 3500 Due with exam on December 5th 20 points 50% penalty if not turned in with the test. No work accepted after 4:30 PM December 5th. 1. ABC has a capital structure...

Name                                    Take Home Portion Test 3
FNCE 3500                                Due with exam on December 5th
20 points         50% penalty if not turned in with the test. No work accepted after 4:30 PM December 5th.
1. ABC has a capital structure with debt at 60% and equity at 40%. They can raise the following debt:
· Up to \$5 million at a pre-tax cost of 8%
· The next \$5 million at a cost of 8.5%
· Any debt more than \$10 million is 9%
· Combined tax rate is 30%
For equity:
· Net income is \$11 million and the dividend payout ratio is 40% (retained earnings are 60%)
· Internal equity costs 15%
· External equity costs 15.56%
a. Calculate and list, in order, the
eak points (3) for debt and equity
. compute and list each WACC (There is one more WACC than
eak points)
c. graph the Marginal Cost of Capital schedule
d. Assume that ABC can invest in an unlimited number of projects with an IRR of 9.65%. (The IOS)
· Graph the Investment Opportunity Schedule on the MCC graph
· What is the optimal capital budget?

FNCE 3500                            Capital Budgeting
Test 3 Take Home #2 (20 points)                        Due in class with Test 3
1. XYZ is considering a project with the following data:
Sales Revenue = \$850,000
Pre-tax Cannibalization cost = \$45,000
Asset Cost = \$600,000
Straight line depreciation over 3 years with zero salvage value
Operating costs = \$550,000 (does not include depreciation)
Tax Rate 21%
a. What is the after-tax cash flow? Assume a cost of capital of 10% and that the cash flows are constant for 3 years. What is the NPV? Is this a good project?
. Unfortunately, we will need to invest cash for inventory, etc. What is the NPV if we need to invest \$100,000 in NWC today to open the doors and the NWC will be recovered as follows: \$20,000 in year 1, \$50,000 in year 2 and \$30,000 in year 3? Is this a good project now?

## Solution

Kushal answered on Dec 05 2021
Take Home-1
1
Break Points
Amount raised    Interpretation
Equity    19.25    Every 19.25 million internally raised will bear cost of equity of 15%
A.                B.
Amount raised in debt    Amount Raised in equity        Amount Raised    Cost of debt    Cost of equity    WACC    Expected Return
Breakpoint-1    5    3.333        8.3333333333    5.60%    15.00%    9.36%    9.65%
Breakpoint-1    5    3.333        16.6666666667    5.95%    15.00%    9.57%    9.65%
Breakpoint-3    18.875    12.583        56.4583333333    6.30%    15.00%    9.78%    9.65%
100    6.30%    15.56%    10.00%    9.65%
C.    Marginal cost and investment schedule graph
D.    Assumption- All projects return 9.65%
Investment    Expected Returns
10    9.65%
20    9.65%
30    9.65%
40    9.65%
50    9.65%
Optimal Capital budget
The point where...
SOLUTION.PDF