1. You were hired as a financial consultant in determining its optimal capital budget for next year.

You have identified the

following possible indivisible, independent, average-risk capital projects.
PROJECT COST IRR
X 100,000 18%
Y 80,000 16%
Z 50,000 15%

Marginal cost of capital is as follows:

NEW CAPITAL MARGINAL COST
0 – P200,000 14.2%
Above P200,000 15.4%

a. Identify which project(s) is/are acceptable?

b. Based on your preceding answer, how much will be the optimal capital budget?

2. The following information is provided to you to enable a firm to satisfy debt holders and equity holders.

TAX RATE 40%

P10 million in common stock requiring a 12% return
P6 million in bonds requiring an 8% return

a. What is the firm’s before tax cost of debt?

b. What is the firm’s after tax cost of debt?
c. How much is the cash flow after tax and interest the firm will need?
d. Assuming additional expenses to be incurred amounts to P135,000, how much cash is needed by the firm for its I
investment activity expected to generate a rate of return of 9%
e. Should the company accept or reject the proposition? Support with quantitative data.

3. Calculate the cost of equity using constant growth model given the following:
Current dividend = P2.50 Payout ratio = 0.7 (assuming it is not changing)
ROE = 15% Current market price of the stock = P11.50

a. Compute for the cost of equity

b. Is the current management adding to or reducing the shareholders’ value? Support quantitatively

4. Heiress Company, which is debt-free and finances only with equity from retained earnings, is considering 7 equal sized
capital budgeting projects. Its CFO hired you to assist in deciding whether none, some, or all of the projects should be
accepted. You have the following information: rRF = 4.5%; RPM= 5.5%; and b = 0.92.
The company adds or subtracts a specific percentage to the corporate WACC when it evaluates projects that have above or
below-average risk. Data on the 7 projects are shown below. If these are the only projects under consideration:

a. Which project(s) is/are acceptable?

b. How large should the capital budget be?

Project Risk Risk Factor Expected Return Cost (Millions)

1 Very Low -2.00% 7.60% P25.0
2 Low -1.00% 9.15% P25.0
3 Average 0.00% 10.10% P25.0
4 High 1.00% 10.40% P25.0
5 Very high 2.00% 10.80% P25.0
6 Very high 2.00% 10.90% P25.0
7 Very high 2.00% 13.00% P25.0

5. Use the following information to answer the question(s) below.

Beta Volatility Assume that the risk-free rate of interest is 3% and you
Eenie 0.45 20% estimate the market’s expected rate of return to be 9%
Meenie 0.75 18%
a. Which firm has the most total risk?
Miney 1.05 35% b. Which firm has the least market risk?
Moe 1.20 25% c. Which firm has the highest k?