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BWFF5013 Individual Assignment (10%)

1. The document provides information to calculate the weighted average cost of capital (WACC) for Cleen Power Co., including details on debt and common stock outstanding, market risk premium, and risk-free rate. 2. Questions ask to calculate current share price given growth rates in dividends for Upton Co. and the price required for Antiques R Us shares today given an expected reduction in dividends. 3. A question provides details to evaluate a potential capital investment project for Chung Chemical Corporation, including calculating initial outlay, annual after-tax cash flows, terminal cash flow, and determining if the project should be accepted. 4. Questions involve calculating expected returns and weights for portfolios

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197 views2 pages

BWFF5013 Individual Assignment (10%)

1. The document provides information to calculate the weighted average cost of capital (WACC) for Cleen Power Co., including details on debt and common stock outstanding, market risk premium, and risk-free rate. 2. Questions ask to calculate current share price given growth rates in dividends for Upton Co. and the price required for Antiques R Us shares today given an expected reduction in dividends. 3. A question provides details to evaluate a potential capital investment project for Chung Chemical Corporation, including calculating initial outlay, annual after-tax cash flows, terminal cash flow, and determining if the project should be accepted. 4. Questions involve calculating expected returns and weights for portfolios

Uploaded by

fitri
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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BWFF5013

INDIVIDUAL ASSIGNMENT (10%)

1. Given the following information for Cleen Power Co., find the WACC. Assume the
company’s tax rate is 35 percent.
Debt 7,000 6 percent coupon bonds outstanding, $1,000 par value, 20 years to
maturity, selling for 105 percent of par; the bonds make semiannual
payments.
Commo 180,000 shares outstanding, selling for $58 per share; the beta is 1.10.
n Stock
Market 6.5 percent market risk premium and 4.3 percent risk-free rate.

2a. Upton Co. is growing quickly. Dividends are expected to grow at 27 percent for the next
three years, with the growth rate falling off to a constant 4.5 percent thereafter. If the
required return is 10.4 percent and the company just paid a dividend of $2.65, what is the
current share price?

2b. Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $16,
but management expects to reduce the payout by 3 percent per year indefinitely. If you
require a return of 9.3 percent on this stock, what will you pay for a share today?

3. The Chung Chemical Corporation is considering the purchase of a chemical analysis


machine. Although the machine being considered will result in an increase in earnings
before interest and taxes of $35,000 per year, it has a purchase price of $100,000, and it
would cost an additional $5,000 after tax to properly install this machine. In addition, to
properly operate this machine, inventory must be increased by $5,000. This machine has
an expected life of 10 years, after which it will have no salvage value. Also, assume
simplified straight line depreciation and that this machine is being depreciated down to
zero, a 34% marginal tax rate and a required rate of return of 15 percent.
a. What is the initial outlay associated with this project?
b. What are the annual after-tax cash flows associated with this project for years 1
through 9?
c. What is the terminal cash flow in year 10?
d. Should this machine be purchased?

4 a. You have RM10,000 to invest in a stock portfolio. Your choices are stock X with an
expected return of 16 percent and stock Y with an expected return of 10 percent. If your
goal is to create a portfolio with an expected return of 12.9 percent, how much money
will you invest in stock X and in stock Y?
4b. A stock has a beta of 0.92 and an expected return of 10.3 percent. A risk free assets
currently earns 5 percent.

i) What is the expected return on a portfolio that is equally invested in the two assets?
ii) If a portfolio of the two assets has a beta of 0.5, what are the portfolio weights?
iii) If a portfolio of the two assets has an expected return of 9 percent, what is its beta?
iv) If a portfolio of the two assets has a beta of 1,84, what are the portfolio weights?

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