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You are an investment banker trying to value Dell, a private company. You have forecasted Dell’s free cash flows, but need to compute its WACC in order to value the firm. Unfortunately Dell is private and so it does not have stock data, so you cannot use CAPM to find its cost of equity. You know the following: Dell has debt of $200 at a cost of 5%; further, Dell recently raised money from equity investors, valuing the equity at $1,000. Further, HP is in the same exact business as Dell, but it is public so you can see its cost of equity. HP is financed with a constant debt-to-equity ratio of 1/10, has a cost of debt of 3%, a cost of equity of 22%, and a tax rate of 30%
Find the unlevered cost of capital for Dell and HP. Assume that HP’s debt-to-equity ratio will stay constant forever.
Using the unlevered cost of capital for Dell above, find the cost of levered equity for Dell (assuming that Dell’s capital structure D/E will remain fixed).
Using your above 2 answers, find Dell’s WACC assuming it has the same tax rate as HP.
A firm had $60,000 in cash at year-end 2014 and $25,000 at year-end 2015. The firm invested in property plant and equipment totaling $300,000; cash flow from financing totaled $185,000. What was the cash flow from operating activities?
You have been asked by the president and CEO of your firm to evaluate the proposed acquisition of a new labeling machine for the firm’s pharmacy production lines. The machine’s price is $50,000, and it would cost another $10,000 for transportation an..
A summarized income statement for Leveraged Inc. is presented below. Sales $1,000000 Cost of sales 600,000 Gross profit 400,000 operating expenses 250,000 Operating Income 150,000 Interest expense 30,000 Earnings before taxes 120,000 Income tax 40,00..
Assume a particular stock has an annual standard deviation of 35 percent. What is the standard deviation for a three-month period? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign ..
What agency problem might be identified from managers using corporate funds for non-value maximizing purposes?
Suppose you will need $175,000 in 7 years to start up a new gym. With a 6% interest rate, how much do you have to invest now in order to achieve this goal? Repeat Question, but this time assume you contribute an equal amount each year. What would be ..
Which one of the following is not a benefit of activity-based costing?
Thomas Brothers is expected to pay a $2.6 per share dividend at the end of the year (that is, D1 = $2.6). The dividend is expected to grow at a constant rate of 6% a year. The required rate of return on the stock, rs, is 19%. What is the stock's curr..
What are the profitability indexes and the NPVs of the following two projects: - If you can invest in only one of the projects, which would you choose?
Project A requires an initial investment of $7,500 at t = 0. Project A has an expected life of 4 years with cash inflows of $5,000, $4,500, $900, $2,000 at the end of Years 1, 2, 3, and 4 respectively. The project has a required return of 15%. What i..
Green Tea House has a 35 percent tax rate and an interest tax shield valued at $6,728 for the year. How much did the firm pay in annual interest?
Find the following values for a single cash flow:
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