Estimate the value of the plant today assuming no growth

Assignment Help Finance Basics
Reference no: EM13496486

1.Your company operates a steel plant. On average, revenues from the plant are $30 million per year. All of the plants costs are variable costs and are consistently 80% of revenues, including energy costs associated with powering the plant, which represent one quarter of the plant’s costs,or an average of $6 million per year. Suppose the plant has an asset beta of 1.25, the riskfree rate is 4%, and the market risk premium is 5%. The tax rate is 40%, and there are no other costs.

a. Estimate the value of the plant today assuming no growth.

b. Suppose you enter a long-term contract which will supply all of the plant’s energy needs for a fixed cost of $3 million per year (before tax). What is the value of the plant if you take this contract?

c. How would taking the contract in (b) change the plant’s cost of capital? Explain.

Reference no: EM13496486

Questions Cloud

Calculate the requested amounts : Calculate the requested amounts showing your work below and entering your answers to the right.
What is unidas after-tax debt cost of capital : Unida Systems has 40 million shares outstanding trading for $10 per share. In addition, Unida has $100 million in outstanding debt. Suppose Unida’s equity cost of capital is 15%, its debt cost of capital is 8%, and the corporate tax rate is 40%.
Define straight up tp reach the same maximum heaight : A ball thrown at an initial angle of 37 and initial velocity of 23.0m/s reaches a maximum height. With what initial speed must a ball be thrown straight up tp reach the same maximum heaight
What is the magnitude of the total resistive force : A car needs to generate 75.0 hp in order to maintain a constant velocity of 21.8 m/s on a flat road. What is the magnitude of the total resistive force acting on the car
Estimate the value of the plant today assuming no growth : Suppose you enter a long-term contract which will supply all of the plant’s energy needs for a fixed cost of $3 million per year (before tax). What is the value of the plant if you take this contract?
Earnings management : What are we attempting to achieve when producing financial statements and Examples of where accounting can produce different numbers legally
Explain the name of the product and it''s structural formula : What is the name of the product and it's structural formula between 2-propanol and benzoic acid
How fast must the rotor of the generator rotate : The maximum induced emf in a generator rotating at 249 rpm is 44 V. How fast must the rotor of the generator rotate
Determine is the image upright or inverted : The image behind a convex mirror (radius of curvature = 86 cm) is located 17 cm behind the mirror. Is the image upright or inverted

Reviews

Write a Review

Finance Basics Questions & Answers

  What is the expected return for abc laboratories stock

The treasurer at ABC Laboratories is trying to determine the expected return on equity for the firm. The stock's beta is 1.053, the current T-bill rate is 5.47%, and the expected market return is 14.83%. What is the expected return for ABC Laborat..

  What are the uses of the eoq model

What are the uses of the EOQ model? What questionable assumptions are being made by the EOQ model?

  What is a cross rate calculate the two cross rates between

what is a cross rate? calculate the two cross rates between yen and australian

  Compute profits and returns on investment and convert

calculate profits and returns on an investment and convert holding period returns to annual returns. define risk and

  What is the value of a bond that matures in 5 years

What is the value of a bond that matures in 5 years, has an annual coupon payment of $110, and a par value of $2,000? Assume a required rate of return of 8.69%. A. $1,876.99 B. $938.50 C. $1,891.36 D. $1,749.83

  Calculate stock price for companies

Red, Inc., Yellow Corporation, and Blue firm each will pay a dividend of $2.85 next year. The growth rate in dividends for all three firms is 5%.

  Use to evaluate the equipment purchase

If the firm's tax rate is 30%, what discount rate should you use to evaluate the equipment purchase?

  What would its annual return be

What is Horatio Ltd's. maximum willingness to pay for this property using the net capitalization method.

  Finance question-defining terms

Illustrate out the following terms and describe how they affect one another. More specifically, for what purposes are they employed and how do they relate to one another: efficient portfolio, individual investor, short selling, Sharpe ratio, beta ..

  How much in resources must be invested to support

Calculate the firm's daily cash operating expenditure. How much in resources must be invested to support its cash conversion cycle?

  What is the target stock price in one year

What is the target stock price in one year? Assuming the company pays no dividends, what is the implied return on the company's stock over the next year?

  What is scientific software effective annual rate

What is Scientific Software's effective annual rate of interest if it borrows $100,000 for 12 months? For 6 months? For 3 months? (Note: Assume a 365- day year and a prime rate that remains at 8.5% during the life of the loan.)

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