question archive Rob wants to start his own restaurant company
Rob wants to start his own restaurant company
Subject:FinancePrice:3.86 Bought8
Rob wants to start his own restaurant company. He wants to finance the company using debt, preferred stocks, and common stocks. He has decided to set up his capital structure with 40% debt, 5% preferred stocks, and 55% common stocks. Market statistics: the risk-free rate is 2% and the market rate is 8%.
Rob wants to decide between building Restaurant A or Restaurant B. The following are projected cash flows for the restaurants.
Year Restaurant A Restaurant B
0 (7,500,000) (9,000,000)
1 1,600,000 1,700,000
2 1,800,000 2,000,000
3 2,000,000 2,200,000
4 2,200,000 2,000,000
5 1,800,000 1,800,000
6 1,600,000 1,600,000
7 1,400,000 1,400,000
8 1,300,000 1,200,000
9 1,200,000 1,000,000
10 1,000,000 1,000,000
1. What is the payback period for Restaurant A and Restaurant B? If Rob requires a payback period of 5 years, which restaurant(s) should he acquire? Round answer to hundredths place (for example: 12.34).
Payback Payback
Restaurant A = Restaurant B = Acquire?
2. Calculate the WACC for Rob's Restaurants. Assume 10% cost of debt, 13% required return on preferred stocks, and 16% required return on common stocks. Also assume 40% taxes. Round answer to the hundredths place (for example: 12.34%).
WACC =
