Costs of capital?

What does a company's cost of capital represent and how is it calculated? How do market rates and the company's perceived market risk impact its cost of capital, and how does the company's debt to equity mix impact this cost of capital? You are leading the review of these elements in a meeting with managers and accountants.

Corporate Financial Theory

Question 1 Assume you have just been promoted junior financial manager of a company. You are very smart and are planning to be promoted in the next 2-2.5 years. An associate of your company shows you a project with the following cash flows. End of Year Cash Flows 0 -$100,000 1 $40,000 2 $40,000 3 $40,000 4 $40,000 5 -$20,000 6 $80,000 a) Compute the payback period of this project. b) Compute the discounted payback period of this project assuming a discount rate of 5%. c) Would you accept this project? Explain. d) Compute the NPV of the project. Is this a good project? e) Would you use the IRR as evaluation technique for this project? Explain. Please ... click for more

Corporate Finance

Question 1 A company has a capital structure composed by 20% Debt and 80% Equity. The cost of the debt is 5% per year while the cost of equity is 15% per year. The company is considering two different projects. The cash flows of the two projects are reported in the table below. Please see attached. A company has a capital structure composed by 20% Debt and 80% Equity. The cost of the debt is 5% per year while the cost of equity is 15% per year. The company is considering two different projects. The cash flows of the two projects are reported in the table below. Time Project A Project B 0 ($120,000) ($150,000) 1 $25,000 $38,000 2 $35,000 $38,000 3 $50,000 $50,000 4 $50,000 $5... click for more

Corporate Finance: NPV of 2 mutually exclusive pollution devices; asset Beta for corporations

Question 1 Bill is evaluating 2 mutually exclusive pollution devices. The real discount rate is 5%. The cash flows for each device are as follows Time Device A Device B 0 (100,000) (200,000) 1 (5,000) (3,500) 2 (5,000) (3,500) 3 (5,000) (3,500) 4 (3,500) 5 (3,500) 6 (3,500) a) Compute the cost of each machine in terms of NPV? b) Which machine will be cheaper for the company to use? Explain Question 2 Consider the following data for A Corporation and B Corporation A Corp B Corp Covariance with Market 34.2% 25.5% Variance Market 30% 30% % Debt 40 25 % Equity 60 75 D/E Ratio 67% 33% Calculate the asset Beta for corporations A and B Ple... click for more

Corporate Finance

Quest 1: a) Is it possible to increase return and decrease risk of a portfolio at the same time? b) Why do investors buy common stocks instead of investing all their money in bonds and t bills. Question 2: Use the attached table table to answer - A) If the investor allocates 30% of his money to Scott Corp. and the remaining 70% to Bill Corp and the correlation of returns of the 2 stocks is 0.5, what is the expected returns and standard deviation of the portfolio? B)Explain what happens to the expected returns and standard deviation when you reallocate your portfolio and invest 50% in each stock