Question Question 2 (3 Marks) Anna is a Vice President at the J Corporation. The company is considering investing in a new factory and Anna must decide whether it is a feasible project. In order to assess the viability of the project Anna must first calculate the rate of return that equity holders expect from the company stock. The annual returns for J Corp. and for a market index are given below. Currently the risk-free rate of return is 1.8% and the market risk-premium is 6.9% . a) What is the beta of J Corp.’s stock? 1.50 (1 Mark)(Round your answer to two decimal places) b) Using the CAPM model what is the expected rate of return on J Corp. stock for the coming year? 12.15 (2 Mark)(Round your answer to one one-hundreth of a percent) ? Year J Corp. Return (%) Market Return (%) Enter your Final Answer Here 1 -1.16 -0.40 2 20.11 13.78 3 18.64 12.80 4 20.14 13.80 5 -15.56 -10.00 6 23.94 16.33 7 51.46 34.68 8 19.02 13.05 9 4.54 3.40 10 21.61 14.78 11 -9.50 -5.96 12 -3.56 -2.00 Complete your rough work in the space below a) Beta = Slope Formula 1.5 b) r=rf+Bx(rm-rf) rf=risk free rate=1.8% Bx=Beta=1.5 rm=Expected market return=6.9%+1.8%=8.7% r=1.8+1.5(8.7-1.8) Question 3 (3 Marks) 0.00 Refer to Question 2. Now that Anna has determined an appropriate rate of return for J Corp.’s stock she must calculate the firm’s Weighted Average Cost of Capital (WACC). There are currently 56.7 Million J Corp. common shares outstanding. Each share is currently priced at $7.09 . As well the firm has 7000 bonds outstanding and each bond has a face value of $10000 a yield to maturity of 3.78% and a quoted price of $10678.00 . J Corp.’s tax rate is 30%. J Corp. has no preferred shares outstanding. What is J Corp.’s WACC? 10.66 % (Round your answer to one one-hundredth of a percent) ? Enter your Final Answer Here Complete your rough work in the space below E=Outstanding common shares WACC=[D/Vx(1-Tc)rdebt]+[P/Vxrpreferred]+[E/Vxrequity] =56700000*$7.09 =[74746000/476749000x(1-0.30)0.0378]+[0/476749000×0]+[402003000/476749000x.1215] 4.02E+08 =[0.00414847]+[0]+[0.1024509] 0.106599 P=Outstanding Preferred Shares =0 D=Firm’s Debt Question 4 (5 Marks) 0.00% Refer to Questions 2 and 3. The land for the factory will cost $1240000 . The factory will cost $7800000 to build and construction will take two years with construction costs payable in equal installments at the start of each year. The factory will operate for 20 years; however at the end of the fifth tenth and fifteenth year of operation refurbishment costs will be $800000 . At the end of its 20 year lifespan the land can be resold for $1260000 . There is a 70% probability that the factory’s net operating cash flows will be $1527421 ; however there is a 30% chance that net cash flows will only be $1023812 . You may assume that net operating cash flows flow at the end of each year. a) What are the Expected net operating cash flows per year? $ Enter Answer (1 Mark)(Round your answer to 2 decimal places) =7000*10678 74746000 V=D+P+E=Total Value of Firm’s Capital =74756000+0+402003000 4.77E+08 Tc=Firm’s coporate tax Rate=30% rdebt=return on firm’s debt=YTM =3.78% rpreferred=Return on firm’s preferred shares =0 requity=Return on firm’s common shares Use CAPM=12.15% 12.15

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