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Consider a firm with a debt-equity ratio of 0.40. The required rate of return on this firm’s unlevered equity is 18% and the pre-tax cost of debt is 8%. Sales, which totalled $34 million last year, are projected to remain at that level for the foreseeable future. Variable costs comprise 52% of sales, while fixed costs are $5,000,000. The corporate tax rate is 35% and all earnings are distributed as dividends to shareholders at the end of each year. Based on the above information, answer the following questions:
What is the value of the company’s debt? and equity using the WACC method?
Madison manufacturing is considering a new machine that costs $350,000 and would reduce pre tax manufacturing costs by $110,000 annually. Madison would use the 3 year MACRS method to depreciate the machine, and management thinks the machine would hav..
Assume that all agents are risk neutral, and that the risk-free rate is 3%. The economic conditions in the upcoming year can be either good or bad. The first project has low payoff volatility and the second project has a high payoff volatility. What ..
Exhibit 1.29 presents common-size and percentage change balance sheets and Exhibit 1.30 (page 81) presents common-size and percentage change income statements for Starbucks for2009–2012. Net earnings as a percentage of total revenues increased from 3..
A Treasury bill has a bid yield of 2.87% and an ask yield of 2.85%. The bill matures in 203 days. Assume a face value of $1,000. What is the dollar spread for this bill?
Successive loan deposited in a checking account and no banks keeping any excess reserves - suppose First Main Street Bank loans out all of its new excess reserves to Kristen, who immediately uses the funds to write a check to ]aural.
Triangle Pediatrics is faced with multiple investment alternatives that pay interest as indicated in answers (a) through (e). If we assume Triangle Pediatrics has $100 to invest today, which alternative will give it the most money at the end of one y..
You make the following forecasts about the returns of a stock: in a recession (probability 40%) the stock's return is -6%, in a boom (probability 60%) the stock's return is 10%. What is the expected return for this stock? Total investment in stock A ..
In each of the following cases, calculate the accounting break-even and the cash break-even points. Ignore any tax effects in calculating the cash break-even.
Name a current advertising slogan you believe is particularly effective for developing a unique selling proposition. Explain the methods the company uses, the target market, and strategies that you think are effective in advertising this product. Ple..
Baxter plans to hedge its cash flows with a forward contract. What is the dollar amount of cash flows that Baxter will receive in five years if it accepts this project?
You have just taken out a $16,000 car loan with a 8% APR, compounded monthly. The loan is for 5 years. When you make your first payment in one month, how much of the payment will go toward the principal of the loan and how much will go towards intere..
MACRS 5-year property Year Rate 1 20.00% 2 32.00% 3 19.20% 4 11.52% 5 11.52% 6 5.76% Ronnie's Custom Cars purchased some fixed assets two years ago for $50,000. The assets are classified as 5-year property for MACRS. Ronnie is considering selling the..
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