## Transcribed Text

1- A stock has a beta of 1.34, the expected return on the market is 9 percent, and the risk-free rate is 3 percent. What must the expected
return on this stock be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g.,
32.16).)
Expected return
%
2- The Saunders Investment Bank has the following financing outstanding.
Debt:
100,000 bonds with a coupon rate of 6 percent and a current price quote of 108; the bonds have 20 years to
maturity. 270,000 zero coupon bonds with a price quote of 18.5 and 30 years until maturity. Assume semiannual
compounding.
Preferred stock:
190,000 shares of percent preferred stock with a current price of $72, and a par value of $100.
Common stock:
3,000,000 shares of common stock: the current price is $58, and the beta of the stock is 1.15.
Market:
The corporate tax ratei is 30 percent, the market risk premium is 5 percent, and the risk-free rate is 2 percent.
What is the WACC for the company? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal
places (e.g., 32.16).)
WACC
%
3- Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market
share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line
of RDSs. This will be a five-year project. The company bought some land three years ago for $5.2 million in anticipation of using as toxic
dump site for waste chemicals, buti built a piping system to safely discard the chemicals instead. The land was appraised last week for $6
million. In five years, the aftertax value of the land will be $6.4 million, but the company expects to keep the land for a future project. The
company wants to build its new manufacturing plant on this land; the plant and equipment will cost $32.56 million to build. The following
market data on DEI's securities is current:
Debt:
237,000 7.4 percent coupon bonds outstanding, 25 years to maturity, selling for 109 percent of par; the bonds
have a $1,000 par value each and make semiannual payments.
Common stock:
9,500,000 shares outstanding, selling for $71. per share; the beta is 1.2.
Preferred stock:
457,000 shares of 6 percent preferred stock outstanding, selling for $81.70 per share and and having a par value
of $100.
Market:
8 percent expected market risk premium; 6 percent risk-free rate.
DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 9 percent on new common stock issues, 7 percent on new
preferred stock issues, and 5 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit)
in setting these spreads. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares
of
common stock. DEI's tax rate is 38 percent. The project requires $1,475,000 in initial net working capital investment to get operational.
Assume Wharton raises all equity for new projects externally.
a. Calculate the project's initial Time 0 cash flow, taking into account all side effects. Assume that the net working capital will not require
flotation costs. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your
answer in dollars, not millions of dollars (e.g., 1,234,567).)
Cash flow
$
b. The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas.
Management has told you to use an adjustment factor of 3 percent to account for this increased riskiness. Calculate the appropriate
discount rate to use when evaluating DEI's project. (Do not round intermediate calculations. Enter your answer as a percent
rounded to 2 decimal places (e.g., 32.16).)
Discount rate
%
c. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (thatis, the end of
Year 5), the plant and equipment can be scrapped for $5 2 million. What is the aftertax salvage value of this plant and equipment? (Do
not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Aftertax salvage value
$
d. The company will incur $7,500,000 in annual fixed costs. The plan is to manufacture 20,500 RDSs per year and sell them at $11,150
per machine; the variable production costs are $9,750 per RDS What is the annual operating cash flow (OCF) from this project? (Do
not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Operating cash flow
$
e. DEI's comptroller is primarily interested in the impact of DEI's investments on the bottom line of reported accounting statements. What
will you tell her is the accounting break-even quantity of RDSs sold for this project? (Do not round intermediate calculations and
round your final answer to the nearest whole number.)
Break-even quantity
units
f. Finally, DEI's president wants you to throw all your calculations, assumptions, and everything else into the report for the chief financial
officer; all he wants to know is what the RDS project's internal rate of return (IRR) and net present value (NPV) are. Assume that the net
working capital will not require flotation costs. (Enter your NPV answer in dollars, not millions of dollars (e.g., 1,234,567). Enter
your IRR answer as a percent. Do not round intermediate calculations and round your final answers to 2 decimal places (e.g.,
32.16).)
IRR
%
NPV
$

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