of its 26. Afirm unes its weighted A automaticaly gives preferential treatment i
ID: 2806688 • Letter: O
Question
of its 26. Afirm unes its weighted A automaticaly gives preferential treatment in the allocation of funds to its riskiest D. aintine average cost of capital to evaluate the proposed projects for all verying divisions. By doing so, the im encourages the division automatically division to recommend only their most conservative projects of the fi Currene ris maximizes the total value created for ns tes capital funds evenly among its divihions 27 Swizer Industries has two separate divisions Division X has less risk so its projects are assigned a to the firm's WACC minus 05 percent. Division Y has more risk and its projects are equity ratio assigned a of 0.45 and a rate equal to the firm's WACC plus 1 percent. The company has a debt- rate of 35 percent. The cost of equity is 14.7 percent and the cost of debt is 5.1 percent. Presently percent. Presently, each division is considering a new project. Division Ys project provides 12.3 percent rate of return and Division x's project percent return. Which projects, if any, should the company accept? provides an 11.64 A Accept both X and Y B. Accept X and rejectY C. Reject X and acceptY D. Reject both X and Y E. The answer cannot be determined based on the information provided 28. USA Manufacturing issued 30-year, 8.5 percent semiannual bonds 6 years ago. The bonds currently sell at 101 percent of face value. What is the firm's aftertax cost of debt if the tax rate is 30 percent? A. 5.88 percent B. 5.62 percent C. 5.76 percent D. 659 percent E 8.40 percentExplanation / Answer
26)
Answer to this is A
Automatically gives preferential treatment in the allocation of funds to its riskiest division.
27)
Answer to this is B
Accept X and reject Y
Weighted average cost of capital
= (1/1.45) * (0.147) + (0.45 / 1.45) * (0.051) = 0.1172
Project X:
Required rate of return = 0.1172 - 0.005 = 11.22%
Note: 0.5% reduction
Project X return of 11.64 % exceeds the required rate of 11.22 % , so its project should be accepted.
Project Y
Required return = 0.1172 + 0.01 = 12.72 %
Note : increase in 1% percent
Project Y return of 12.30 % is less than the required rate of 12.72 % , so its project should be rejected.
28)
Answer to this is A
After tax cost of debt
Firstly we can use the financial calculator as it is based on the time value
N=48.PV = -1010, PMT = 42.5, FV = 1000
Note: N=48 (for 24 years) as it is 6 years ago and 6 years have passed and hence remaining 24 years.
For 24 years it has 48 semiannual periods
N=48.PV = -1010, PMT = 42.5, FV = 1000
Press CPT
Now Press I/Y
we get I/Y = 4.201222
Now make it annual
4.201222 * 2
= 8.402444
Hence after tax cost of debt
= 8.402444 * ( 1- 0.3)
= 5.8817108 %
roughly 5.88%
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