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The firm gets 70% of its capital from common stock and 30% from debt. The debtholder’s required rate of return is 8%. The equity holder’s required rate of return is 13% and the firm’s tax rate is 20%. The project involves an immediate investment of $10,000 for the purchase and installation of equipment. The project will require the immediate purchase of $1000 in inventory, and increase in accounts receivable of $800. Accounts payable will increase $600. The equipment will be depreciated straight-line, over 4 years, down to a salvage value of $1000. The project is expected to generate after tax cash flows [=ebit(1-t)+ dep] in the amount of $5,166 at the end of each of the next four years. Assume that at the end of the fourth year the related equipment is sold for $2,000, and the changes in working capital are reversed. What is the net present value (NPV) of the project? What is IRR?
The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.2 and an expected return of 13.1 percent. Stock B has a beta of 0.75 and an expected return of 11.4 percent. Are these stocks correctly p..
A firm is expected to pay a dividend of $1.45 next year and $1.60 the following year. Financial analysts believe the stock will be at their price target of $45 in two years. Compute the value of this stock with a required return of 11.4 percent.
Eureka enterprises had an all equity cost of capital of 12 percent. When the firm switched to being levered its cost of equity increased to 13.4 percent and its pretax cost of debt was 7.5 percent. What was the firm's debt-equity ratio after the swit..
A company currently pays a dividend of $1 per share (D0 = $1). It is estimated that the company's dividend will grow at a rate of 17% per year for the next 2 years, then at a constant rate of 8% thereafter. What is your estimate of the stock's curren..
A generous benefactor to the university plans to make a one-time endowment which would provide the school with $20000 scholarship per year into perpetuity. The rate of interest is expected to be 5% for all future time periods? How large
The covariance of the returns between Willow Stock and Sky Diamond Stock is 0.0940. The variance of Willow is 0.1890, and the variance of Sky Diamond is 0.1210. What is the correlation coefficient between the returns of the two stocks?
What are the ethical issues?
______________ is when derivatives are used to try and make money by taking on risk. A swap is a method for reducing financial risk. Which of the following statements about swaps is not correct? Suppose you believe that Du Pont’s stock price is going..
You have been promoted as your firm's new president. Naturally, you want to strengthen the company's financial position. Which of the following actions would make it FINANCIALLY stronger?
You are considering an investment in a new sub-industry of interest to your firm. To understand the importance of terminal value assumptions you have decided to calculate NPV under two different sets of assumptions. The appropriate discount rate for ..
A firm has free cash flow of $500,000 on their most recent financial statements. The firm expects the FCF’s to grow at about 2.5% per year. The cost of capital for the firm is 10.50%. what is the intrinsic value of common equity per share?
Dustin is considering an investment that will pay $3200 a year for 8 years, starting 1 year from today (which is normal). How much should Dustin pay for this investment today if he wishes to earn a 6 percent annual rate of return?
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