Estimate the value of the plant today assuming no growth

Assignment Help Finance Basics
Reference no: EM13496486

1.Your company operates a steel plant. On average, revenues from the plant are $30 million per year. All of the plants costs are variable costs and are consistently 80% of revenues, including energy costs associated with powering the plant, which represent one quarter of the plant’s costs,or an average of $6 million per year. Suppose the plant has an asset beta of 1.25, the riskfree rate is 4%, and the market risk premium is 5%. The tax rate is 40%, and there are no other costs.

a. Estimate the value of the plant today assuming no growth.

b. Suppose you enter a long-term contract which will supply all of the plant’s energy needs for a fixed cost of $3 million per year (before tax). What is the value of the plant if you take this contract?

c. How would taking the contract in (b) change the plant’s cost of capital? Explain.

Reference no: EM13496486

Questions Cloud

Calculate the requested amounts : Calculate the requested amounts showing your work below and entering your answers to the right.
What is unidas after-tax debt cost of capital : Unida Systems has 40 million shares outstanding trading for $10 per share. In addition, Unida has $100 million in outstanding debt. Suppose Unida’s equity cost of capital is 15%, its debt cost of capital is 8%, and the corporate tax rate is 40%.
Define straight up tp reach the same maximum heaight : A ball thrown at an initial angle of 37 and initial velocity of 23.0m/s reaches a maximum height. With what initial speed must a ball be thrown straight up tp reach the same maximum heaight
What is the magnitude of the total resistive force : A car needs to generate 75.0 hp in order to maintain a constant velocity of 21.8 m/s on a flat road. What is the magnitude of the total resistive force acting on the car
Estimate the value of the plant today assuming no growth : Suppose you enter a long-term contract which will supply all of the plant’s energy needs for a fixed cost of $3 million per year (before tax). What is the value of the plant if you take this contract?
Earnings management : What are we attempting to achieve when producing financial statements and Examples of where accounting can produce different numbers legally
Explain the name of the product and it''s structural formula : What is the name of the product and it's structural formula between 2-propanol and benzoic acid
How fast must the rotor of the generator rotate : The maximum induced emf in a generator rotating at 249 rpm is 44 V. How fast must the rotor of the generator rotate
Determine is the image upright or inverted : The image behind a convex mirror (radius of curvature = 86 cm) is located 17 cm behind the mirror. Is the image upright or inverted

Reviews

Write a Review

Finance Basics Questions & Answers

  Newco inc a company formed recently trades on the stock

fact situationnewco inc. a company formed recently trades on the stock exchange and its stock currently trades at 8 per

  Select two of the many capital structure concepts such as

select two of the many capital structure concepts such as modigliani and miller pecking order theory leverage and so on

  Computing yield to maturity for u.s. treasuries securities

Computing yield to maturity for U.S. Treasuries securities and examine the chart WSJ or IBD provides

  How are treasury bonds bought

What are some of the factors you should consider when buying a bond?

  Which component has the most significance in the total

What are the components of WACC? Which component has the most significance in the total? Over which component does management have the greatest influence?

  Determine the cost of equity capital for the firm

The Allegheny Valley Power Company common stock has a beta of 0.80. If the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of equity capital for the firm (using the CAPM).

  What interest rate is the bank required by law

What interest rate is the bank required by law to report to potential borrowers?

  What range of stock prices generates a profit

The price of the stock is currently $29. You sell the stock short. Illustrate how to use the call or the put to reduce your risk exposure.

  Computing future value of annuity over time

If you can earn eight percent per year on your retirement account, how much will you have to save each year if you want to retire in 20 years with $1 million?

  How the changes affected the financial analysis process

How have these changes affected the financial analysis process and are these changes beneficial to financial professional?

  What is the expected stock price one year

CC Inc. stock recently paid a dividend of $3. The company expects to boost the dividend at a rate of 15% for the next two years. Thereafter, the growth rate is expected to be 5%. The required return on the stock is 12%. What is the expected ..

  What is the apr used for this loan

You obtained a loan of $20,000 to finance your home improvement project. Based on a monthly compounding over 24 months, the end -of-the-month equal payment was figured to be $922.90. What is the APR used for this loan?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd