Thurman Industries plans to issue a $100 par perpetual preferred stock with a fixed annual dividend of 8 percent of par.  It would sell for $107.20, but flotation costs would be 5 percent of the market price.  What is the percentage cost of preferred stock after taking flotation costs into account?

The Bettencourt Company’s currently outstanding bonds have a 12.1 percent coupon and a 9.2 percent yield to maturity.  Bettencourt believes it could issue new bonds that would provide a similar yield to maturity.  If its marginal tax rate is 30 percent, what is Bettencourt’s after-tax cost of debt?

A firm with a 10 percent cost of capital is considering a project for this year’s capital budget.  The project’s expected after-tax cash flows are as follows: Year: 0 1 2 3 4 Cash flow: -$9,000 $3,200 $4,100 $4,400 $3,700 Calculate the project’s profitability index (PI).

The Bettencourt Company’s currently outstanding bonds have a 7.8 percent coupon and a 9.1 percent yield to maturity.  Bettencourt believes it could issue new bonds that would provide a similar yield to maturity.  If its marginal tax rate is 25 percent, what is Bettencourt’s after-tax cost of debt?

A firm with a 10.5 percent cost of capital is considering a project for this year’s capital budget.  The project’s expected after-tax cash flows are as follows: Year: 0 1 2 3 4 Cash flow: -$5,000 $1,800 $2,400 $2,300 $2,300 Calculate the project’s internal rate of return (IRR).

A firm with a 12.5 percent cost of capital is considering a project for this year’s capital budget.  The project’s expected after-tax cash flows are as follows: Year: 0 1 2 3 4 Cash flow: -$11,000 $5,300 $5,200 $4,800 $5,300 Calculate the project’s internal rate of return (IRR).

A firm with a 12.5 percent cost of capital is evaluating two projects for this year’s capital budget.  The projects’ expected after-tax cash flows are as follows: Year: 0 1 2 3 Project X: -$14,000 $7,600 $7,600 $6,900 Project Y: -$8,000 $3,300 $3,900 $3,400 If Projects X and Y are mutually exclusive, which one(s) should the firm adopt?

If a firm’s beta is 1.1, the risk-free rate is 6.5%, and the expected return on the market is 11.5%, what will be the firm’s cost of equity using the CAPM approach?

Koerschen Wholesalers can invest in one of two mutually exclusive machines that will make a product it needs for the next 6 years.  Machine C costs $11 million but realizes after-tax inflows of $4.8 million per year for 3 years, after which it must be replaced.  Machine D costs $17 million and realizes after-tax inflows of $4.6 million per year for 6 years.  Based on the firm’s cost of capital of 11 percent, the NPV of Machine D is $2,460,474, with an equivalent annual annuity (EAA) of $581,598 per year.  Calculate the EAA of Machine C. Compare your result to that of Machine D and decide which to recommend.

In theory, the decision maker should view market risk as being of primary importance. However, within-firm, or corporate, risk is relevant to a firm’s