Q No.1(a)Reactive Industries has the following capital structure. Its corporate tax rare is 35 percent. What is its WACC? Security Market value required returnDebt $ 20 million 6%Preferred stock 10 8%Common stock 50 12%

Q No.1(b)Take data from question 1 aboveCalculate cost of capital if company want to change capital structure debt:40%, preferred stock 10% and stock 50%. Should company change or not give reason Q No.2A company has issued 10 year bond a year ago at par value with a coupon rate of 9%, paid annually. Today the bond is selling at 1150. Firm is in the tax bracket of 40%. Company has preferred stock on which dividend is fixed $ 4 and market price of preferred stock is $ 45. Company issued common stock, dividend currently paid $2 which is expected to grow at a rate of 4% and stock is selling at $ 25. If company is planning to invest in a project at a ratio of 40:20:40. What should be weighted average cost of capital of this project?

Q No.3 Find the WACC of Naveed Computers. The total book value of the firm’s equity is $12 million; book value per share is $22. The stocks sell for a price of $32 per share, and the cost of equity is 16 percent. The firm’s bonds have a face value of $6 million and sell at a price of 110 percent of face value. The yield to maturity on the bond is 9 percent, and the firm’s tax rate is 40 percent.

Q No.4(a)Reactive Industries has the following capital structure. Its corporate tax rare is 35 percent. What is its WACC? Security Market value required returnDebt $ 30 million 8%Preferred stock 15 12%Common stock 65 15%

Q No.4(b)Take data from question 1 aboveCalculate cost of capital if company want to change capital structure debt:40%, preferred stock 10% and stock 50%. Should company change or not give reason Q No.5A company has issued 10 year bond a year ago at par value with a coupon rate of 9%, paid annually. Today the bond is selling at 850. Firms is in the tax bracket of 40%. Company has preferred stock on which dividend is fixed $ 4 and market price of preferred stock is $ 45. Company issued common stock, dividend currently paid $3 which is expected to grow at a rate of 6% and stock is selling at $ 45. If company is planning to invest in a project at a ratio of 50:10:40. What should be weighted average cost of capital of this project?

Q No.6 Find the WACC of Naveed Computers. The total book value of the firm’s equity is $12 million; book value per share is $22. The stocks sell for a price of $32 per share, and the cost of equity is 16 percent. The firm’s bonds have a face value of $6 million and sell at a price of 110 percent of face value. The yield to maturity on the bond is 9 percent, and the firm’s tax rate is 40 percent.

Q No.7The following tabulation gives earnings per share figures for Exxon manufacturing during the preceding 10 years. The firm’s common stock, 140,000 shares outstanding, is now selling for Rs.50 a share, and the expected dividend for the coming year i.e. 2002 is 50 percent of EPS for the year. Investors expect past trends to continue, so g may be based on the historical earnings growth rate.

Year EPS1992 Rs.21993 2.161994 2.33

1995 2.521996 2.721997 2.941998 3.181999 3.432000 3.702001 4.00

The current interest rate on new debt is 8 percent. The firm’s marginal tax rate is 40 percent. The firm’s market value capital structure, considered to be optimal, is as follows:

Debt Rs. 3,000,000Common equity 7,000,000

1. Calculate the firm’s after tax cost of new debt and of common equity, assuming new equity comes only from reinvested cash flow ( assuming constant growth rate )

2. Fine the firm’s WACC, assuming no new common stock is sold.

Q No8Longstreet Communication Inc. has the following capital structure, which it considers to be optimal: debt 25%, preferred stock 15% and common stock 60%. Tax rate is 40% and investors expect earnings and dividends to grow at a constant rate of 6% in future. Company paid a dividend of Rs.3.6 per share last year and its stock currently sells at a price of Rs.60 per share. Risk free rate is 6%, market risk premium is 5% and company stock beta is 1.3. New preferred could be sold to the public at a price of Rs.100 per share, with a dividend of Rs.9. Flotation costs of Rs.5 per share would be incurred.Debt could be sold at a interest rate of 9%.

Required:Define business risk and financial risk? mark-1Find the component costs of debt, preferred stock, and common stock. marks-2Calculate WACC. mark-1If company decided to change capital structure as follows: debt 35%, preferred stock 15% and common stock 50%. Assume same component cost as you computed in part 1. Should company change its capital structure? give reason.

Q No.Assume that the expected return on the market portfolio is 15% and the riskless return is 9%. Also assume that all the projects listed here are perpetuities with annual casyh flows in Rs. And betas as indicated. None of the projects requires or precludes any of the other projects, and each projects costs Rs.2000.

Projects: A B C D E FAnnualCash flow 310 500 435 270 385 450

Beta 1.0 2.25 2.22 0.65 1.37 2.36

What is the NPV of each project?Which projects should the firm undertake?

Q No.The following information has been gathered about ICI company. On the basis of these information calculate ICI WACC.

Current market value of common stock ( 10 million outstanding) Rs.23.63/ shareNext year’s expected cash dividend Rs. 1.92/shareExpected constant annual dividend growth rate 8%Current market value of bonds ( 100,000 bonds outstanding, 8.5% coupon, maturing in 21 years) Rs.835/bondCorporate tax rate 34%