Considering opening up a chain of coffee shop

Assignment Help Financial Management

Reference no: EM131014815

LilyMac Studios, a national chain of photography studios, is considering opening up a chain of coffee shop/ art galleries. While the existing operations of the firm have a beta of 1.17, the new chain is expected to have a beta of 0.8. LilyMac currently has 500,000 shares of common stock outstanding, which are selling for $ 63.72 per share, with annual dividends on common shares of $5.00/share, and dividends growing at 6.00% annually for an indefinite period of time. Also LilyMacy has a $ 10 million bond issue, selling at 104 percent of par. The expected market risk premium is 6 percent, and the current risk- free rate is 5.5 percent. The bonds pay an 8 percent semiannual coupon and mature in 20 years. Determine the cost of equity with flotation costs using the simple average of equity cost determined on the basis of the constant growth method and CAPM.

The current operations of the firm produce EBIT of $ 18 million per year, and the chain’s operations are expected to add $ 25 million per year to that. The new chain will be funded with 65 percent equity and 35 percent debt, and estimated flotation costs are expected to be 12 percent and 5 percent, respectively. What should be the WACC for the new chain of coffee shops?

Reference no: EM131014815

Questions Cloud

Annual standard deviation of returns equal : You gather the following data: ABC has a CAPM beta of 0.75 and an annual standard deviation of returns equal to 70%. The S&P 500 has an annual standard deviation of returns equal to 17%, and we can use the S&P 500 as a proxy for the market portfolio ..

What is the price of this annual coupon bond : AAA firm’s semiannual bond has 12 years maturity and coupon rate of 8.75% semiannually. The firm also sells annual bonds with all the same condition except the coupon is paid annually (means ytm is the same). What is the price of this annual coupon b..

Price of this bond if the market yield rises : A 12-year, 5 percent coupon bond pays interest annually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield rises to 6 percent from the current level of 5.5 percent?

What is the wavelength of the acoustic wave : From the lab, you know that the speed of sound is v = 331.4 (m/s) + 0.6 (m/soC) · T, where T is the current temperature. We know that the frequency of a sound wave at 11? is 550Hz. What is the wavelength of the acoustic wave

Considering opening up a chain of coffee shop : LilyMac Studios, a national chain of photography studios, is considering opening up a chain of coffee shop/ art galleries. While the existing operations of the firm have a beta of 1.17, the new chain is expected to have a beta of 0.8. The new chain w..

The risk premium in the market : The expected return for the general market is 13.0%, and the risk premium in the market is 8.7%. Tasaco, LBM, and Exxos have betas of 0.818, 0.629, and 0.548, respectively. What are the appropriate expected rates of return for the three securities?

Expansion project-coupon bonds with a par value : ABC Co wants to raise $6 million for an expansion project. The company wants to raise this money by selling zero coupon bonds with a par value (face value) of $1000. These bonds would be sold with a Yield to Maturity of 4% per year with semi-annual c..

Do you think that this analogy is appropriate : The Law of Increasing Entropy is an impenetrable barrier which no evolutionary mechanism yet suggested has ever been able to overcome. Evolution and entropy are opposing and mutually exclusive concepts. If the entropy principle is really a univers..

What is the value of the option to wait : Hickock Mining is evaluating when to open a gold mine. The mine has 50,400 ounces of gold left that can be mined, and mining operations will produce 6,300 ounces per year. The required return on the gold mine is 12 percent, and it will cost $34.3 mil..

User Account

All Pages