Question

Financial Management

d. The following information applies to the questions displayed below.An all-equity firm is considering the following projects:

e. Suppose your boss comes to you and asks you to re-evaluate a capital budgeting project. The first evaluation was in error, he explains, because it ignored flotation costs. To correct for this, he asks you to evaluate the project using a higher cost of capital which incorporates these costs. Is your boss' approach correct? Why or why not?

c. Titan Mining Corporation has 8 million shares of equity outstanding and1,350,000 5.9 per cent semi-annual bonds outstanding, par value £100 each.The equity currently sells for £32 per share and has a beta of 1.3, and the bonds have 15 years to maturity and sell for 93 per cent of par. The market risk premium is 8 per cent, T-bills are yielding 4 per cent, and Titan Mining's tax rate is 28 per cent. What is the firm's market value capital structure?

a. Explain the role weighted average cost of capital plays when determining a project's cost of capital.

The T-bill rate is 5 per cent, and the expected return on the market is 6.9 percent. Which projects should be accepted?

b. Miller Manufacturing has a target debt-equity ratio of 0.66. Its cost of equity is18 per cent, and its cost of debt is 8 per cent. If the tax rate is 35 per cent.What is Miller's WACC?


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