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Triad Corporation has established a joint venture with Tobacco Road Construction, Inc., to build a toll road in North Carolina. The initial investment in paving equipment is $81.6 million. The equipment will be fully depreciated using the straight-line method over its economic life of five years. Earnings before interest, taxes, and depreciation collected from the toll road are projected to be $13.7 million per annum for 20 years starting from the end of the first year. The corporate tax rate is 40 percent. The required rate of return for the project under all-equity financing is 14 percent. The pretax cost of debt for the joint partnership is 10.1 percent. To encourage investment in the country’s infrastructure, the U.S. government will subsidize the project with a $26.6 million, 15-year loan at an interest rate of 6.6 percent per year. All principal will be repaid in one balloon payment at the end of Year 15. The company issued subsidized debt instead of issuing debt at the terms it normally would. Assume the face amount and maturity of the debt issue are the same.
Calculate the gain or loss from subsidized debt. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Input the amount as a positive value. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What is the firm’s sustainable growth rate? If the firm grows at its sustainable growth rate, how much debt will be issued next year?
Project K costs $40,000, its expected cash inflows are $9,000 per year for 8 years, and its WACC is 11%. What is the project's discounted payback? Project K costs $70,000, its expected cash inflows are $14,000 per year for 8 years, and its WACC is 13..
You buy a share of stock, write a one-year call option with a strike price X = $11, and buy a one-year put option with a strike price X = $11. Your net initial cost to establish the entire portfolio is $10.50. What must be the risk-free interest rate..
Fool Proof Software is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4. Revenues and ot..
Develop mechanisms that tend to make principals more confident.- What are agency costs?- What can principals do to reduce agency costs?
Ronald Thump is interested in expanding his firm. After careful consideration, he has determined three areas in which he might invest additional funds: (1) product research and development, (2) manufacturing operations improvements, and (3) advertisi..
You are an institutional money manager looking to add some Ginnie Mae MBS to your portfolio. "At the current price of 113-10, the calculated cash flow yield of 3.4788% represents the return that an investor is guaranteed to receive upon buying this m..
Peabody Energy plans to issue a convertible bond in the near future. The bond will pay a $1,000 maturity value in exactly 30 years. The coupon rate will be 1 percent (with a semiannual coupon, of course). The TRACE reporting system is a reliable sour..
On June 1, you borrowed $220,000 to buy a house. The mortgage rate is 4.25% compounded monthly. The loan is to be repaid in equal monthly payments of $1,655.02 over fifteen years. The first payment is due on July 1. How much of this first payment wil..
You have $36,000 on deposit with no outstanding checks or uncleared deposits. One day you write a check for $4,100 and then deposit a check for $6,900. What are your disbursement, collection, and net floats?
Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends, beginning with a dividend of $0.50 coming 3 years from toda..
Which of the following are characteristics of an unfunded nonqualified deferred compensation plan?
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