1. Roentgen Company has the following capital structure.

1. Roentgen Company has the following capital structure.

Bonds with face amount $40 million, coupon 7%, selling at par,

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Bonds with face value $50 million, coupon 8%, 10 years to maturity, selling at 106,

6 million shares of stock, priced at $55 per share, with ? = 1.29.

The risk-free rate is 5% and the expected return on the market is 13%. The tax rate of Aberdeen is 33%. Find the WACC of Aberdeen.

2. The following table gives the information about two companies, where the debt and equity are in millions of dollars.

The risk-free rate is 4.4% and the expected return on the market 12%. Lorentz Airline wants to buy a hotel using its existing capital. Find the required rate of return on the acquisition.

3. Becquerel Company has a total value of $76 million. Its stock sells at $33 a share. At present, it has a loan of $12 million at 7% interest. It needs $4 million in additional capital. It can get the financing by selling 125,000 shares of stock at $32 (net) per share, or by borrowing the money at 7.5% interest. The expected EBIT after the new financing is $7 million, with a standard deviation of $3 million. Which method of financing will maximize its EPS? What is the probability that you have made the right choice?

4. Curie Company needs a new machine, which it can depreciate completely on a straight-line basis over a period of 4 years. Alternately, it can lease the machine for four years, paying $12,500 in lease payments in advance each year and claiming the tax benefit at the end of the year. The tax rate of Paisley is 32% and it can borrow money at 10% interest rate. Calculate the purchase price of the machine, which will equalize the cost of leasing to the cost of buying.

5. Lord Rayleigh has bought a house for $350,000, of which $50,000 is the value of the land. Livingston expects that the value of the property will increase at the compound rate of 5% per year. He will rent the house for the next six years and then sell it. He will depreciate the house uniformly over 24 years. The income tax rate of Rayleigh is 32%, and the risk-adjusted discount rate is 11%. The annual expenses on the property (real estate taxes, maintenance, etc.) are $9000, realized at the end of each year. Find the amount of rent that Rayleigh must collect at the end of each year to break even.