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Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt–equity ratio of .40, but the industry target debt–equity ratio is .35. The industry average beta is 1.2. The market risk premium is 7 percent, and the risk-free rate is 5 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 40 percent. The project requires an initial outlay of $675,000 and is expected to result in a $95,000 cash inflow at the end of the first year. The project will be financed at Blue Angel’s target debt–equity ratio. Annual cash flows from the project will grow at a constant rate of 5 percent until the end of the fifth year and remain constant forever thereafter.
Calculate the NPV of the project.
Jamaica Tours, Inc., started the year with a balance of retained earnings of $1,780 million. The company reported net income for the year of $284 million and paid dividends of $17 million to the preferred stockholders and $59 million to common stockh..
Since depreciation is a cash expense, the faster an asset is depreciated, the lower the projected NPV from investing in the asset. Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 y..
A purely competitive firm finds that the market price for its product is $30.00. It has a fixed cost of $100.00 and a variable cost of $17.50 per unit for the first 50 units and then $35.00 per unit for all successive units. What is the average varia..
Bond X is a premium bond making annual payments. The bond has a coupon rate of 8.9 percent, a YTM of 6.9 percent, and has 14 years to maturity. Bond Y is a discount bond making annual payments. What do you expect the prices of these bonds to be in 12..
Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding th..
Compute the required monthly payment on a $80,000 30-year, fixed-rate mortgage with a nominal interest rate of 5.80%. How much of the payment goes toward principal and interest during the first year?
The Pitt Stop generated net income of $1,250 and paid dividends of $250. Accounts payable fell by $100, accounts receivable increased by $75, inventory increased by $60, depreciation expense was $25, and net fixed assets decreased by $15. There was n..
A Treasury bond with the longest maturity (30 years) has an ask price quoted at 97:06. The coupon rate is 2.70 percent, paid semi annually. What is the yield to maturity of this bond?
Find the arithmetic and geometric average growth rate of dividends. Then use the current stock price, recent dividend, and geometric growth rate to find the firm’s discount rate. Excel sheets/tables are fine to illustrate the information, but should ..
How do we calculate an earnings growth rate? Please illustrate your calculation using an example you make up yourself and not one from the book or the internet.
Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $13 million, of which 85% has been depreciated. The used equipment can be sold today for $4.55 million, and its tax rate is 40%. What is the equipment..
Stock Y has a beta of 1.6 and an expected return of 16.6 percent. Stock Z has a beta of 0.8 and an expected return of 9.4 percent. If the risk-free rate is 5.1 percent and the market risk premium is 6.6 percent, the reward-to-risk ratios for stocks Y..
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