1. On January 1, 2002, HomeSafe Cab Co. will issue new bonds to finance its expansion plans. Currently outstanding 10% coupon rate, January 1, 2013 HomeSafe bonds are selling for $1,110.67. If interest is paid semi-annually, what must the coupon rate of the new bonds be in order for the issue to sell at par? This issue will also mature in 11 years and pay semi-annual coupons.

2. Jinglin has been asked to evaluate a new machine costing $120,000. The old machine has a book value of $30,000 and a market value of $50,000. Old machine will be sold and the after-tax cash flow will be used to offset the cost of the new machine. Net working capital will increase by $5,000. The firm’s tax rate is 40 percent. What is the initial cash outlay for the new machine?

3. Gong estimates that a new investment’s income/revenue from operations is $80,000. Annual depreciation for the new machine will be $20,000 and the lost depreciation of the old machine is $10,000. The firm would also borrow to buy the new machine, incurring annual interest expense of $5,000. The tax rate is 40 percent. How much is the yearly after tax annual operating cash flow?

4. The Nisit Corporation is considering a project with a five-year life. The project requires $70,000 of fixed assets (initial installed cash outlay) that are classified as five-year property for MACRS. Variable costs equal 65 percent of sales, fixed costs are $14,000, and the tax rate is 36 percent. What is the operating cash flow for Year 4 given the following sales estimates and MACRS depreciation allowance percentages?
Year 1 2 3 4 5
Sales $24,000 $26,000 $28,000 $30,000 $32,000
MACRS rate 20.00 32.00 19.20 11.52 11.52

5. Yin estimates the market value of a machine will be $14,000 at the end of year five. At that time, the book value of the machine will be $4,000. The machine originally cost $42,000 and an increase of $4,000 in NWC was invested at the start of the project. If the machine is sold in year five and the tax rate is 40 percent, what is the after tax terminal cash flow?

6. Jianan purchased an asset that costs $600,000 and is depreciated straight-line to zero over its six-year tax life. The asset is to be used in a four-year project; at the end of the project, the asset can be sold for $200,000. If the relevant tax rate is 34 percent, what is the after tax cash flow from the sale of this asset?

7. Minjie has a project that has sales of $630,000, costs of $280,000, depreciation of $60,000 each year, interest expense of $3,062, and a tax rate of 40 percent. What is the depreciation tax shield?

8. Yang’s Anchovies, Inc. sold a 20-year bond issue 2 years ago. The issue has a 6.2% annual coupon and a $1,000 face value. If the current market price per bond is $751.64 and the tax rate is 34%, what is the after-tax cost of debt?

9. Guangda’s firm is considering a project that will generate cash flows of $70,000 per year forever with the first cash flow received at the end of first year. The project has the same risk as the firm's overall operations and must be financed externally. Equity costs 12% and debt costs 6% after-tax. The firm's debt/equity ratio is 0.8. What is the most the firm could pay for the project and still earn its required return? (Hint, calculate WACC and then calculate PV)

10. Calculate the weighted average cost of capital for Munif’s firm with the following financing:
• Debt: 50,000 bonds, par $1000, 8 percent coupon interest rate in perpetuity (forever)
• Preferred stock: 200,000 shares, par $100, 10 percent coupon interest rate (Po=D1/r)
• Common equity: $90 million
For this firm the tax rate is 40 percent, the cost of common equity is 12 percent, the before tax rate for debt is 10 percent, and the required return for preferred stock is 10 percent. (Hint : calculate: 1. bond value, 2. value of preferred stock, 3. weights, 4. after tax cost of debt, 5. WACC)

11. Nan’s firm has 2,500,000 shares of common stock outstanding with a market price today of $3.00 each. It has 2,500 bonds outstanding, each with a market value today of $1,600 (160% of face). The bonds mature in 20 years, have a coupon rate of 10%, and pay coupons annually. The firm's beta is 1.3, the risk free rate is 5%, and the market risk premium is 9%. The tax rate is 40%. Compute the WACC. (Hint, calculate: 1.
weights, 2. after tax cost of debt, 3. cost of equity, 4. WACC)

1. On January 1, 2002, HomeSafe Cab Co. will issue new bonds to fin...