Considering opening up a chain of coffee shop

Assignment Help Financial Management
Reference no: EM131014815

LilyMac Studios, a national chain of photography studios, is considering opening up a chain of coffee shop/ art galleries. While the existing operations of the firm have a beta of 1.17, the new chain is expected to have a beta of 0.8. LilyMac currently has 500,000 shares of common stock outstanding, which are selling for $ 63.72 per share, with annual dividends on common shares of $5.00/share, and dividends growing at 6.00% annually for an indefinite period of time. Also LilyMacy has a $ 10 million bond issue, selling at 104 percent of par. The expected market risk premium is 6 percent, and the current risk- free rate is 5.5 percent. The bonds pay an 8 percent semiannual coupon and mature in 20 years. Determine the cost of equity with flotation costs using the simple average of equity cost determined on the basis of the constant growth method and CAPM.

The current operations of the firm produce EBIT of $ 18 million per year, and the chain’s operations are expected to add $ 25 million per year to that. The new chain will be funded with 65 percent equity and 35 percent debt, and estimated flotation costs are expected to be 12 percent and 5 percent, respectively. What should be the WACC for the new chain of coffee shops?

Reference no: EM131014815

Questions Cloud

Annual standard deviation of returns equal : You gather the following data: ABC has a CAPM beta of 0.75 and an annual standard deviation of returns equal to 70%. The S&P 500 has an annual standard deviation of returns equal to 17%, and we can use the S&P 500 as a proxy for the market portfolio ..
What is the price of this annual coupon bond : AAA firm’s semiannual bond has 12 years maturity and coupon rate of 8.75% semiannually. The firm also sells annual bonds with all the same condition except the coupon is paid annually (means ytm is the same). What is the price of this annual coupon b..
Price of this bond if the market yield rises : A 12-year, 5 percent coupon bond pays interest annually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield rises to 6 percent from the current level of 5.5 percent?
What is the wavelength of the acoustic wave : From the lab, you know that the speed of sound is v = 331.4 (m/s) + 0.6 (m/soC) · T, where T is the current temperature. We know that the frequency of a sound wave at 11? is 550Hz. What is the wavelength of the acoustic wave
Considering opening up a chain of coffee shop : LilyMac Studios, a national chain of photography studios, is considering opening up a chain of coffee shop/ art galleries. While the existing operations of the firm have a beta of 1.17, the new chain is expected to have a beta of 0.8. The new chain w..
The risk premium in the market : The expected return for the general market is 13.0%, and the risk premium in the market is 8.7%. Tasaco, LBM, and Exxos have betas of 0.818, 0.629, and 0.548, respectively. What are the appropriate expected rates of return for the three securities?
Expansion project-coupon bonds with a par value : ABC Co wants to raise $6 million for an expansion project. The company wants to raise this money by selling zero coupon bonds with a par value (face value) of $1000. These bonds would be sold with a Yield to Maturity of 4% per year with semi-annual c..
Do you think that this analogy is appropriate : The Law of Increasing Entropy is an impenetrable barrier which no evolutionary mechanism yet suggested has ever been able to overcome. Evolution and entropy are opposing and mutually exclusive concepts. If the entropy principle is really a univers..
What is the value of the option to wait : Hickock Mining is evaluating when to open a gold mine. The mine has 50,400 ounces of gold left that can be mined, and mining operations will produce 6,300 ounces per year. The required return on the gold mine is 12 percent, and it will cost $34.3 mil..

Reviews

Write a Review

 

Financial Management Questions & Answers

  How many calls must you write to achieve hedged position

You purchase ten shares of some stock. The delta of a certain call on this stock is 0.63339, and the gamma of this call is 0.073. The delta of a put with the same terms as the call is !0.27145. You wish to delta and gamma hedge your position by purch..

  Calculate the projected cash flows from this project

The Bogart Company, originally established 77 years ago to make baseballs, is now a leading producer of tennis balls, baseballs, footballs, and golf balls. Eleven years ago, the company introduced “Speed Flight”, its first line of high-performance te..

  How much should he set aside today for the purchase

Stephen plans to purchase a car 7 years from now. The car will cost $65,687 at that time. Assume that Stephen can earn 4.69 percent (compounded monthly) on his money. How much should he set aside today for the purchase?

  Compute the levered bheta

We have the Washington firm on which we have the following information. Its bheta unlevered is 3, its D/E is 4/1, and its tax rate is .3. Additionally we know that the default free rate is 5% and the stock market has returned 11 % over a long period ..

  About the finance undergraduate degree

Ben Bates graduated from college six years ago with a finance undergraduate degree. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. What init..

  Company will increase its dividend payment at growth rate

ABC Inc. is expected to pay a dividend of $2.25 in the coming year (D1 = $2.25). The company will increase its dividend payment at a growth rate of 4 percent every year indefinitely (g = 4.0%). If the required rate of return on the stock is 6%, what ..

  How much must you deposit at the end of each year

How much must you deposit at the end of each year for 15 years, to be able to withdraw $500 at the end of year 10 and $1000 at the end of year 15 if your savings earn interest at an annual rate of 7%?

  Use present value of annuity table

How much money does Melinda need to deposit into her investment account today if she wishes to withdraw $8,000 a year for twenty years? She expects to earn an average rate of return of 11 percent. (Choose the closest answer, use present value of annu..

  Project that provides annual cash flows

A project that provides annual cash flows of $16,300 for eight years costs $69,000 today. What is the NPV for the project if the required return is 7 percent? At a required return of 7 percent, should the firm accept this project?

  Negotiating a lease on a new piece of equipment

Furman Industries is negotiating a lease on a new piece of equipment which would cost $200,000 if purchased. he equipment falls into the MACTS-3-year class and it would be used for three years and then sold, because Furman plans to move to a ne facil..

  What is the appropriate current price

A company pledges to pay the following dividends: $2, $8, $3, and then a constant growth rate of 4% indefinitely. If you require an 11% return, what is the appropriate current price?

  If market interest rates remain unchanged

You own a 5-year bond with a face value of $1,000 and a coupon rate of 5 percent with annual payments. The bond is currently worth $810.46. If market interest rates remain unchanged, what will be the value of the bond next year when there are 4 years..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd