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?

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?

Answered Same DayDec 03, 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...

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...

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