WACC Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal:

$$\begin{array}{lc} \text{Debt} & 25 \% \\ \text{Preferred stock} & 15 \\ \text{Common equity} & 60 \\ \hline & 100 \% \\ \hline \hline \end{array}$$

LEI's expected net income this year is $\$ 34,285.72$; its established dividend payout ratio is $30 \%$; its federal-plus-state tax rate is $40 \%$; and investors expect future earnings and dividends to grow at a constant rate of $9 \%$. LEI paid a dividend of $\$ 3.60$ per share last year, and its stock currently sells for $\$ 54.00$ per share. LEI can obtain new capital in the following ways:

• New preferred stock with a dividend of $\$ 11.00$ can be sold to the public at a price of $\$ 95.00$ per share.

• Debt can be sold at an interest rate of $12 \%$.

Calculate the WACC.

ECRI Corporation is a holding company with four main subsidiaries. The percentage of its capital invested in each of the subsidiaries (and their respective betas) are as follows:

$$\begin{array}{lcc} \text{Subsidiary} & \text{Percentage of Capital} & \text{Beta} \\ \hline \text{Electric utility} & 60 \% & 0.70 \\ \text{Cable company} & 25 & 0.90 \\ \text{Real estate development} & 10 & 1.30 \\ \text{International/special projects} & 5 & 1.50 \end{array}$$

a. What is the holding company's beta?

b. If the risk-free rate is $6 \%$ and the market risk premium is $5 \%$, what is the holding company's required rate of return?

c. ECRI is considering a change in its strategic focus; it will reduce its reliance on the electric utility subsidiary, so the percentage of its capital in this subsidiary will be reduced to $50 \%$. At the same time, it will increase its reliance on the international/ special projects division, so the percentage of its capital in that subsidiary will rise to $15 \%$. What will the company's required rate of return be after these changes?

The Holmes Company’s currently outstanding bonds have an 8% coupon and a 10% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 40%, what is Holmes’ after-tax cost of debt?

The management of Brawn Engineering is considering three alternatives to satisfy an OSHA requirement for safety gates in the machine shop. Each gate will completely satisfy the requirement, so no combinations need to be considered. The first costs, operating costs, and salvage values over a 5-year planning horizon are shown below. Using an internal rate of return analysis with a MARR of 20 percent/year, determine the preferred gate.

$$\begin{array}{|l|c|c|c|c|c|c|} \hline \text { End of Year } & 0 & 1 & 2 & 3 & 4 & 5 \\ \hline \text { Gate 1 } & -\$ 15,000 & -\$ 6,500 & -\$ 6,500 & -\$ 6,500 & -\$ 6,500 & -\$ 6,500+\$ 0 \\ \hline \text { Gate 2 } & -\$ 19,000 & -\$ 5,600 & -\$ 5,600 & -\$ 5,600 & -\$ 5,600 & -\$ 5,600+\$ 2,000 \\ \hline \text { Gate 3 } & -\$ 24,000 & -\$ 4,000 & -\$ 4,000 & -\$ 4,000 & -\$ 4,000 & -\$ 4,000+\$ 5,000 \\ \hline \end{array}$$

A transportation engineering study requires that you determine the number of cars that pass through an intersection traveling during morning rush hour. You stand at the side of the road and count the number of cars that pass every 4 minutes at several times as tabulated below. Use the best numerical method to determine (a) the total number of cars that pass between 7:30 and 9:15, and (b) the rate of cars going through the intersection per minute.

$$\begin{matrix}\text{Time (hr)} & \text{7:30} & \text{7:45} & \text{8:00} & \text{8:15} & \text{8:45} & \text{9:15}\\\text{Rate (cars}\\\text{per 4 min} & \text{18} & \text{23} & \text{14} & \text{24} & \text{20} & \text{9}\\\end{matrix}$$

Torch Industries can issue perpetual preferred stock at a price of $57.00 a share. The stock would pay a constant annual dividend of$6.00 a share. What is the company’s cost of preferred stock, $\mathrm{T}_{\mathrm{P}} ?$

A company's fixed operating costs are $\$ 500,000$, its variable costs are $\$ 3.00$ per unit, and the product's sales price is $\$ 4.00$. What is the company's break-even point; that is, at what unit sales volume will its income equal its costs?

Weighted average cost of capital American Exploration, Inc., a natural gas producer, is trying to decide whether to revise its target capital structure. Currently, it targets a 50-50 mix of debt and equity, but it is considering a target capital structure with 70% debt. American Exploration currently has 6% after-tax cost of debt and a 12% cost of common stock. The company does not have any preferred stock outstanding.

b. Assuming that its cost of debt and equity remain unchanged, what will be American Exploration's WACC under the revised target capital structure?

The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 6 percent per year. Callahan's common stock currently sells for 22.00 dollars per share, its last dividend was 2.00 dollars, and it will pay a 2.12 dollars dividend at the end of the current year.

a. Using the DCF approach, what is its cost of common equity?

b. If the firm's beta is 1.2, the risk-free rate is 6 percent, and the average return on the market is 13 percent, what will be the firm's cost of common equity using the CAPM approach?

c. If the firm's bonds earn a return of 11 percent, based on the bond-yield-plus-risk-premium approach, what will be $r_s$ ? Use the midpoint of the risk premium range discussed in the lessons before in your calculations.

d. If you have equal confidence in the inputs used for the three approaches, what is your estimate of Callahan's cost of common equity?

Javits & Sons's common stock currently trades at $\$ 30.00$ a share. It is expected to pay an annual dividend of $\$ 3.00$ a share at the end of the year $\left(D_1=\$ 3.00\right)$, and the constant growth rate is $5 \%$ a year.

a. What is the company's cost of common equity if all of its equity comes from retained earnings?

b. If the company issued new stock, it would incur a $10 \%$ flotation cost. What would be the cost of equity from new stock?

An open-pit mine must fund an account now to pay for maintenance of a tailing pond in perpetuity (after the mine shuts down in 30 years). The costs until shutdown are part of the mine's operating costs. The maintenance costs begin in 31st year at $300,000 annually. (a) How much must be deposited now if the fund will earn 5% interest? How much does this change if the interest rate is 4%? (b) What is a tailing pond? Is the mine building this because they are a good corporate citizen or because they are required to do so? By whom? Could it be both?

Midwest Water Works estimates that its WACC is 10.5%. The company is considering the following capital budgeting projects: $$ \begin{matrix} \text{Project } & \text{Size} & \text{Rate of Return}\\ \text{A} & \text{\$ 1 million} & \text{12.0\\%}\\ \text{B} & \text{2 million} & \text{11.5}\\ \text{C} & \text{2 million} & \text{11.2}\\ \text{D} & \text{2 million} & \text{11.0}\\ \text{E} & \text{1 million} & \text{10.7}\\ \text{F} & \text{1 million} & \text{10.3}\\ \text{G} & \text{1 million} & \text{10.2}\\ \end{matrix} $$ Assume that each of these projects is just as risky as the firm’s existing assets and that the firm may accept all the projects or only some of them. Which set of projects should be accepted? Explain.

The Stewart Company has $2,392,500 in current assets and$1,076,625 in current liabilities. Its initial inventory level is $526,350, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.0?

You must analyze two projects, X and Y. Each project costs $\$ 10,000$, and the firm's WACC is $12 \%$. The expected cash flows are as follows:

$$\begin{array}{rcrrrr|} &0 & 1 & 2 & 3 & 4 \\ \text{Project X} & -\$ 10,000 & \$ 6,500 & \$ 3,000 & \$ 3,000 & \$ 1,000 \\ \text{Project Y} & -\$ 10,000 & \$ 3,500 & \$ 3,500 & \$ 3,500 & \$ 3,500 \end{array}$$

Calculate each project's NPV, IRR, MIRR, payback, and discounted payback.