Essay 02

  • Marie Design Company can purchase a piece of equipment for RM 3,600. The asset has a two – year life, will produce a cash flow of RM 600 in the first year and RM 4,200 in the second year. The interest rate is 15%. Calculate the projects payback assuming steady cash flows. Also calculate the project’s IRR.  Should the project be taken? Check your answer by computing the project’s NPV.

  • Perak Pewter has a cost of debt of 7%, a cost of equity of 11%, and a cost of preferred stock of 8 %. The firm has 104,000 shares of  common stock outstanding at a market price of RM20 a share. There are 40,000 shares of preferred stock outstanding at a market price of RM34 a share. The bond issue has a total face value of RM500,000 and sells at 102% of face value. The tax rate is 34%. What is the weighted average cost of capital for Perak Pewter?

  • What securities have offered the highest average annual returns over the last several decades? Can we conclude that return and risk are related in real life? What are the lessons learned from capital market history? What evidence is there to suggest these lessons are correct?    


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