Koerschen Wholesalers can invest in one of two mutually exclusive machines that will make a product it needs for the next 6 years.  Machine X costs $13 million but realizes after-tax inflows of $5.3 million per year for 3 years, after which it must be replaced.  Machine Y costs $21 million and realizes after-tax inflows of $6.1 million per year for 6 years.  Based on the firm’s cost of capital of 7 percent, the NPV of Machine Y is $8,075,892, with an equivalent annual annuity (EAA) of $1,694,288 per year.  Calculate the EAA of Machine X. Compare your result to that of Machine Y and decide which to recommend.

The Fontenot Company’s cost of common equity is 16 percent, its before-tax cost of debt is 12 percent, and its marginal tax rate is 25 percent.  Given Fontenot’s market value capital structure below, calculate its WACC. Long-term debt $  9,000,000 Common equity   31,000,000 Total capital $40,000,000

A firm with a 13.5 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: -$10,000 $3,100 $4,900 $3,200 $4,900 Calculate the project’s profitability index (PI).

The Yerby Company’s currently outstanding bonds have a 12.6 percent coupon and a 6.5 percent yield to maturity.  Yerby believes it could issue new bonds that would provide a similar yield to maturity.  If its marginal tax rate is 35 percent, what is Yerby’s after-tax cost of debt?

Li & Sons’ common stock currently trades at $70 a share.  It is expected to pay an annual dividend of $3.85 a share at the end of the year (D1 = $3.85), and the constant growth rate is 6.4 percent a year.  What is the company’s cost of common equity if all of its equity comes from retained earnings?

Broussard Industries plans to issue a $100 par perpetual preferred stock with a fixed annual dividend of 11 percent of par.  It would sell for $92.80, but flotation costs would be 10 percent of the market price.  What is the percentage cost of preferred stock after taking flotation costs into account?

A firm with a 9 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: -$14,000 $5,200 $6,200 $6,400 $5,500 Calculate the project’s profitability index (PI).

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 $102.80, but flotation costs would be 10 percent of the market price.  What is the percentage cost of preferred stock after taking flotation costs into account?

Corbett Manufacturing can invest in one of two mutually exclusive machines that will make a product it needs for the next 6 years.  Machine J costs $14 million but realizes after-tax inflows of $6.8 million per year for 3 years, after which it must be replaced.  Machine K costs $25 million and realizes after-tax inflows of $7.3 million per year for 6 years.  Based on the firm’s cost of capital of 12 percent, the NPV of Machine K is $5,013,273, with an equivalent annual annuity (EAA) of $1,219,357 per year.  Calculate the EAA of Machine J. Compare your result to that of Machine K and decide which to recommend.

You work for Whittenerg Inc., which is considering a new project whose data are shown below. What is the project’s Year 1 operating cash flow?   Sales revenues, each year $62,500 Depreciation $  8,000 Other operating costs $25,000 Interest expense $  8,000 Tax rate 35.0%