A-12 Appendix A Solutions to Self-Test Questions and Problems
Chapter 10
a. Component costs are as follows:
Common: rs! D__^1
P 0# g! D_________^0 (1 #^ g)
P 0# g! $3.60(1.09)__________
$54# 0.09! 0.0727 # 0.09! 16.27%Preferred: rp! Preferr_________________ed dividend
Pp! $11____
$95! 11.58%Debt at rd! 12%: rd(1 " T)! 12%(0.6)! 7.20%
b. WACC calculation:
WACC! wdrd(1 " T) # wprp # wcrs
! 0.25(7.2%) # 0.15(11.58%) # 0.60(16.27%)! 13.30%
c. LEI should accept Projects A, B, C, and D. It should reject Project E because
its rate of return does not exceed the WACC of funds needed to! nance it.Chapter 11
a. Net present value (NPV):(^) NPVX! "$10,000 # $6,500__
(1.12)^1
(^) # $3,000__
(1.12)^2
(^) # $3,000__
(1.12)^3
(^) # $1,000__
(1.12)^4
(^)! $966.01
(^) NPVY! "$10,000 # $3,500__
(1.12)^1
(^) # $3,500__
(1.12)^2
(^) # $3,500__
(1.12)^3
(^) # $3,500__
(1.12)^4
(^)! $630.72
Alternatively, using a! nancial calculator, input the cash " ows into the cash
" ow register, enter I/YR! 12, and then press the NPV key to obtain NPVX!
$966.01 and NPVY! $630.72.
Internal rate of return (IRR):
To solve for each project’s IRR,! nd the discount rates that equate each NPV to
zero:
IRRX! 18.0%
IRRY! 15.0%
Modi! ed internal rate of return (MIRR):
To obtain each project’s MIRR, begin by! nding each project’s terminal value
(TV) of cash in" ows:
TVX! $6,500(1.12)^3 # $3,000(1.12)^2 # $3,000(1.12)^1 # $1,000! $17,255.23
TVY! $3,500(1.12)^3 # $3,500(1.12)^2 # $3,500(1.12)^1 # $3,500! $16,727.65
Now each project’s MIRR is the discount rate that equates the PV of the TV to
each project’s cost, $10,000:
MIRRX! 14.61%
MIRRY! 13.73%
Payback:
To determine the payback, construct the cumulative cash " ows for each project.
CUMULATIVE CASH FLOWS
Year Project X Project Y
0 ($10,000) ($10,000)
1 (3,500) (6,500)
2 (500) (3,000)
3 2,500 500
4 3,500 4,000