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Consider a 25/75 debt/equity financing case for your firm. Your firm will produce a before-tax return of $280, the investment costs $200, the tax rate is 30%, the overall opportunity cost of capital (in other taxable projects) is 12%, and when the firm is 25% debt-financed, debt must offer an expected rate of return of 8%.
(If you think of your opportunity cost of capital as the best your firm can achieve elsewhere, then these cost-of-capital numbers are your before-tax costs of capital from other projects before they would be taxed, too. If you think of your opportunity cost of capital as provided by your investors, who [like you] are also taxed, then it is the rate of return before their personal income taxes. The cost of capital for your personal investors is the subject of the next chapter.)
First compute the WACC, then compute the debt as 25% of the WACC value, and show how the APV yields the same result.
Okazaki Company has $40 million face value zero-coupon bonds due in 9.5 years, and its σ is 0.371. The total market value of Okazaki Company is $230 million and the riskless rate is 2.9%. The stock of the company sells at $32 per share. Find the numb..
Anton, Inc., just paid a dividend of $3.25 per share on its stock. The dividends are expected to grow at a constant rate of 4.75 percent per year, indefinitely. What is the current price? What will the price be in five years and in fourteen years?
Describe the following project breakeven and profitability measures. Be sure to include each measure’s economic interpretation.
Prepare a report for the managing director both outlining the theoretical arguments and explaining the real-world influences on the gearing levels of firms.
Calculate the average return per period for an investor who bought 100 shares of the Closed Fund at the initiation and then sold her position at the end of Period 4.
Wal-Mart company Financial analysis
Suppose an individual invests $40,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 4.4 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating e..
Steady As She Goes, Inc., will pay a year-end dividend of $3.70 per share. Investors expect the dividend to grow at a rate of 5% indefinitely. If the stock currently sells for $37 per share, what is the expected rate of return on the stock?
ased on the following information for Project X, should we undertake the venture? To answer, first prepare a pro forma income statement for each year. Next calculate operating cash flow. Finish the problem by determining total cash flow and then calc..
Stock W has an expected return of 12% with a standard deviation of 8%. If returns are normally distributed, then approximately two-thirds of the time the return on stock W will be: a) between 12% and 20% b) between 8% and 12% c)between -4% and 28% d)..
Slow Ride Corp. is evaluating a project with the following cash flows: Year Cash Flow 0 –$ 29,400 1 11,600 2 14,300 3 16,200 4 13,300 5 – 9,800 The company uses an interest rate of 8 percent on all of its projects. Calculate the MIRR of the project u..
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.43 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be w..
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