Projects payback period

Wind Power Systems has 20-year, semi-annual bonds outstanding with a 5 percent coupon. The face amount of each bond is $1,000. These bonds are currently selling for 114 percent of face value.

What is the company’s pre-tax cost of debt?

If the company has a 38% marginal tax rate, what is its after tax cost of debt?

National Home Rentals has a beta of 1.24, a stock price of $22, and recently paid an annual dividend of $0.94 a share. The dividend growth rate is 4.5 percent. The market has a 10.6 percent rate of return and a risk premium of 7.5 percent.

What is the firm’s cost of equity?

) The Daily News had net income of $121,600 of which 40 percent was distributed to the shareholders as dividends. During the year, the company sold $75,000 worth of common stock. What is the cash flow to stockholders?

) Phillips Equipment has 80,000 bonds outstanding with a par value of $1,000 each and a quoted price of 103. The bonds carry a 7.75% coupon that is payable semiannually and mature in 25 years. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $65 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent. The corporate tax rate is 38 percent.

What is the firm’s weighted average cost of capital?

) Consider a project that costs $100,000 to start and has cash flows of $45,000 in year 1, $65,000 in year 2, and $34,000 in year 3.

a. If your firm’s cost of capital is 10%, what is the NPV and IRR for this project?

b. What is this projects payback period?

c. Now assume that you have calculated annual net income figures of $11,666 in year 1, $51,666 in year 2, and $-19,333 in year 3 for this project. If the average book value of the project is $50,000, what is the Average Accounting Return?

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