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You have been hired as a consultant by Chug and Slug Unlimited to determine if the company should proceed with a new set of crab mallets to sell to Maryland crab lovers. Chug and Slug projects sales of 30,000 packs per year for 4 years at a price of $29 for each pack. Variable costs are $12 per pack, and fixed costs are $225,000 per year. New machinery to produce the mallets will cost $500,000 and be depreciated straight-line over 4 years. There is no expected salvage value for the machinery. Current Assets, specifically inventory, of $150,000 will be established in the first year and maintained for the duration of the project. Assume that the company will be able to sell the inventory at cost at the end of the project. Chug and Slug's incremental tax rate is 35%. Equity investors are lining up to finance this project and have an expected return target of 16% (i.e. required return). They will allow 25% debt financing. Banks with whom you have consulted will lend money for this venture at an interest rate of 9%, and have also imposed a maximum debt / assets ratio of 25%. (Note: if the project cash flows exceed the required returns of equity investors and the bank financiers, you get to keep the excess as a bonus for a job well-done!)
Your mission: 1) Determine the WACC for this project. 2) Create a preformed income statement and preformed cash flows for the project. 3) Determine the NPV and IRR of the project.
Tunney Industries can issue perpetual preferred stock at a price of $57.00 a share. The stock would pay a constant annual dividend of $5.00 a share. What is the company's cost of preferred stock, rp?
Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $12.15, but management expects to reduce the payout by 6 percent per year indefinitely. If you require a return of 10 percent on this stock, what will you pay for a sha..
The common stock of Eddie's Engines, Inc. sells for $36.83 a share. The stock is expected to pay $2.80 per share next year. Eddie's has established a pattern of increasing their dividends by 4.9 percent annually and expects to continue doing so. What..
Valuate berkshire hathaway (BRK) with two different methods. Use discounted cash flows in conjunction with an appropriate ratio. How does the share price compare to the calculated valuations?
How might managed earning threaten the credibility of the U.S. financial reporting system? If it is harmful should be get rid of managed earning? Why is it important to manage earnings?
The gross amount of an invoice with freight charge included is $500. The freight charge is $100. The invoice is dated November 29 with terms of 1/10 EOM. Payment is made on January 4. Find: (a) the cash discount, and (b) the net amount paid.
Graser Trucking has $10 billion in assets, and its tax rate is 30%. Its basic earning power (BEP) ratio is 20%, and its return on assets (ROA) is 6%. What is its times-interest-earned (TIE) ratio? Round your answer to two decimal places
The company has just ordered a new kiln for $480,000. Of this sum, $58,000 is described by the supplier as an installation cost. The company does not know whether the Internal Revenue Service (IRS) will permit to treat this cost as a tax-deductible f..
Mideque, Inc., is considering a project to produce pens. It is estimated that the initial cost of the equipment, including transportation, installation, and so forth, will be $24,000. Mideque also estimates that the revenues (sales) each year over th..
The Toy Chest pays an annual dividend of $4.80 per share and sells for $93.20 a share based on a market rate of return of 15 percent. What is the capital gains yield?
How much of the first payment will be principal for a $100,000, 4.26%, thirty year mortgage with annual payments?
Options are used to insure an existing portfolio. For example, buying a put on an asset (or portfolio) reduces the risk of loss in case of a drop in value of the asset. In order to hedge the currency risk, an investor can take a position with a forei..
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