Tom and Jerry’s has 3.5 million
- Tom and Jerry’s has 3.5 million shares of common stock outstanding, 3.5 million shares of preferred stock outstanding, and 25.00 thousand bonds. If the common shares are selling for $14.50 per share, the preferred share are selling for $11.50 per share, and the bonds are selling for 99.85 percent of par, what would be the weight used for equity in the computation of Tom and Jerry’s WACC?
2. TJ Co stock has a beta of 1.57, the current risk-free rate is 5.87 percent, and the expected return on the market is 14.12 percent. What is TJ Co’s cost of equity?
3. You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $350,000. The truck falls into the MACRS 7-year class, and it will be sold after 7 years for $60,000. Use of the truck will require an increase in NWC (spare parts inventory) of $6,000. The truck will have no effect on revenues, but it is expected to save the firm $87,000 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 35 percent. What will the cash flows for this project be during year 3?
4. Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.
Time 0 1 2 3 4 5 6
Cash Flow -1,030 130 470 670 670 270 670
Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?
5 Hollywood Shoes would like to maintain their cash account at a minimum level of $50,000, but expect the standard deviation in net daily cash flows to be $4,000; the effective annual rate on marketable securities to be 6.00 percent per year; and the trading cost per sale or purchase of marketable securities to be $100 per transaction. What will be their optimal upper cash limit? (Round your answer to the nearest dollar amount.)
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