# Essay on Exam 2

Submitted By danterry
Words: 393
Pages: 2

Calculate the WACC rate
Bonds \$4,000,000
Preferred Stock \$2,000,000
Common Stock \$6,000,000 Sell Bonds paying /yr 7% Coupon rate \$73.50
Floatation Costs for Bonds 4% of Market Price \$1,050
Preferred Stock Paying \$2 can be sold for \$25
Cost of issuing these shares \$3
Common Stock Selling \$55 Paid Dividend \$3 expect to grow 10%
Floatation Costs for C Stock: \$5 /share
Companies Tax Rate 30% Required Return = Initial Dividend + Growth Rate in % (market price - floatation costs)

Floatation Costs = Underwriting Costs + Administrative Costs
Before Tax cost of Debt = rate of return a firm must pay on new borrowing

Cost of Bonds 7.39% Cost of Preferred Stock Rp = Dp/Np 9.09% Cost of Preferred Stock Rs = D1/P0 + g 16.00%

ABBREVIATED CASH FLOW STATEMENT

year Cash Flow from operations Capital Expenditures Free Cash Flow % change 2008 \$70,932 \$(710) \$71,642 -
2009 \$133,164 \$10,974 \$122,190 71%
2010 \$107,691 \$14,100 \$93,591 -23%
2011 \$147,454 \$35,758 \$111,696 19%
2012 \$122,447 \$16,599 \$105,848 -5%
2013 \$131,682 \$22,378 \$109,304 3% average 16% DISCOUNTED CASH FLOW
Annual discount rate 3.1%
Cash flow growth rate after year 5 16.1% Return from 1st yr \$70,932
Return from 2nd yr \$133,164 20 Year T-Bill 3%
Return from 3rd yr \$107,691
Return from 4th yr \$147,454
Return from 5th yr \$122,447
Return from 6th yr \$142,199
Return from 7th yr \$165,138
Return from 8th yr \$191,777
Return from 9th yr \$222,713
Return from 10th yr \$258,639
Return from 11th yr \$300,361
Return from 12th yr \$348,814
Return from 13th yr \$405,082
Return from 14th yr \$470,427
Return from 15th yr \$546,313
Return from 16th yr \$634,440
Return from 17th yr \$736,784
Return from 18th yr \$855,637
Return from 19th yr \$993,662
Return from 20th yr \$1,153,953

Residual discounted cash flow after year 20 \$20,214,044.55

Net Present Value of a Debt Free Firm \$25,389,663.07

a Removal costs \$5,000 Tax shield @ 45% \$2,250 Removal costs net of tax effect \$2,750

b Depreciation tax shield Year Depreciation - new equipment Tax shield @45% 1 \$40,000 \$18,000 2 \$70,000 \$31,500 3 \$30,000 \$13,500 4 \$30,000 \$13,500 5 \$30,000 \$13,500 \$90,000

c Foregone tax benefit of old equipment Years Depreciation - new equipment Tax