1. The total book value of WTC’s equity is $40 million and book value per share outstanding is $10. The stock of WTC is currently selling for a price of $75 per share and the beta of WTC is 1.05. The bonds of WTC have a face value of $42 million and sell at a price of 110 percent of face value. The yield to maturity on the bonds is 4.5 percent and the firm’s tax rate is 35 percent. If the E(Rm) = 8% and Rf = 1%, calculate the WACC of WTC.
2. Suppose the company in #1 is considering the following expansion projects. How would you calculate the required rate of return to use in the NPV analysis of the following: Explain.
(a) The company is considering an expansion to double the production of its current product. The company will issue either equity or debt (but not both) to pay for the expansion.
(b) The company is considering adding a new product in a different line of business that is unrelated to their current product.
3. One year ago, an American investor bought 1000 shares of London Bridges at a price of £34 (or 34 UK pounds) per share when the exchange rate was $1.3/1£ (or $1.30 dollars = 1 pound). The investor also invested 3,000,000 Japanese Yen in a money market fund in Japan last year when the exchange rate was 110 Yen = $ 1 US.
(a) Using current exchange rates, what is today’s value of the investor’s portfolio in U.S. dollars if the UK investment decreased 10% (in local currency) and the Japan investment increased 2% (in local currency)?
(b) What is the overall rate of return on the portfolio over the last year?
4. An American firm is evaluating an investment in Mexico. The project will require purchasing equipment from a variety of sources and shipping it to Mexico. The projected cost of buying the equipment and shipping it is $3.2 million. Once the project begins operations, it is expected to last for 5 years (assume straight line depreciation). Expected sales are $1,900,000 each year in the U.S. and the costs of the project are projected to be 6 million pesos each year for the 5 years. If taxes are 35%, the appropriate discount rate is 8% and you use the current exchange rate for pesos:
(a) Calculate the NPV in U.S. dollars. (Show all calculations and ignore working capital)
(b) Calculate the NPV in Mexican pesos. (Show all calculations and ignore working capital)