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Loyd & Associates’ common stock currently trades at $70 a share.  It is expected to pay an annual dividend of $2.80 a share at the end of the year (D1 = $2.80), and the constant growth rate is 9.8 percent a year.  What is the company’s cost of common equity if all of its equity comes from retained earnings?

Koerschen Wholesalers can invest in one of two mutually exclusive machines that will make a product it needs for the next 6 years.  Machine X costs $13 million but realizes after-tax inflows of $5.3 million per year for 3 years, after which it must be replaced.  Machine Y costs $21 million and realizes after-tax inflows of $6.1 million per year for 6 years.  Based on the firm’s cost of capital of 7 percent, the NPV of Machine Y is $8,075,892, with an equivalent annual annuity (EAA) of $1,694,288 per year.  Calculate the EAA of Machine X. Compare your result to that of Machine Y and decide which to recommend.

Weston Foods is considering the following independent projects for the coming year: Project RequiredInvestment ExpectedRate of Return Risk X $4 million 14.0% High Y   8 million   9.5% Average Z   8 million   7.0% Low Weston’s WACC is 10.5 percent, but it adjusts for risk by adding 2 percent to the WACC for high-risk projects and subtracting 2 percent for low-risk projects.  Which project(s) should Weston accept assuming it faces no capital constraints?

Broussard Industries plans to issue a $100 par perpetual preferred stock with a fixed annual dividend of 12 percent of par.  It would sell for $92.20, but flotation costs would be 5 percent of the market price.  What is the percentage cost of preferred stock after taking flotation costs into account?

The Fontenot Company’s cost of common equity is 16 percent, its before-tax cost of debt is 12 percent, and its marginal tax rate is 25 percent.  Given Fontenot’s market value capital structure below, calculate its WACC. Long-term debt $  9,000,000 Common equity   31,000,000 Total capital $40,000,000

Sperry Corporation can invest in one of two mutually exclusive machines that will make a product it needs for the next 4 years.  Machine A costs $9 million but realizes after-tax inflows of $6.3 million per year for 2 years, after which it must be replaced.  Machine B costs $12 million and realizes after-tax inflows of $4.8 million per year for 4 years.  Based on the firm’s cost of capital of 12 percent, the NPV of Machine B is $2,579,277, with an equivalent annual annuity (EAA) of $849,187 per year.  Calculate the EAA of Machine A. Compare your result to that of Machine B and decide which to recommend.

The Rodman Company’s currently outstanding bonds have a 7.4 percent coupon and a 6.4 percent yield to maturity.  Rodman believes it could issue new bonds that would provide a similar yield to maturity.  If its marginal tax rate is 35 percent, what is Rodman’s after-tax cost of debt?

Ritter Corporation can invest in one of two mutually exclusive machines that will make a product it needs for the next 4 years.  Machine A costs $9 million but realizes after-tax inflows of $7.0 million per year for 2 years, after which it must be replaced.  Machine B costs $14 million and realizes after-tax inflows of $5.8 million per year for 4 years.  Based on the firm’s cost of capital of 8 percent, the NPV of Machine B is $5,210,336, with an equivalent annual annuity (EAA) of $1,573,109 per year.  Calculate the EAA of Machine A. Compare your result to that of Machine B and decide which to recommend.

Plummer Industries plans to issue a $100 par perpetual preferred stock with a fixed annual dividend of 12 percent of par.  It would sell for $101.40, but flotation costs would be 5 percent of the market price.  What is the percentage cost of preferred stock after taking flotation costs into account?

A firm with a 12.5 percent cost of capital is evaluating two projects for this year’s capital budget.  The projects’ expected after-tax cash flows are as follows: Year: 0 1 2 3 Project X: -$12,000 $5,400 $4,600 $4,000 Project Y: -$11,000 $5,700 $5,700 $5,300 If Projects X and Y are mutually exclusive, which one(s) should the firm adopt?