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A firm has decided to replace a major piece of industrial equipment. The equipment costs $690,000 to purchase and install and is expected to have a useful life of 5 years, after which it will be sold on the open market and is expected to have a salvage value of $200,000. The firm has a required return on equity of 14% and a large number of outstanding common shares held by many small investors. The firm is financed 50% with debt and 50% with equity.
The new equipment will be one of a large group of assets with a CCA rate of 20%. The firm will finance the purchase with a bank loan at the rate of 7% per year, the same interest rate it pays on its current debt. The loan will be repaid in equal installments at the end of each year. The corporate tax rate is 40%. The company is responsible for maintenance and insurance costs of $40,000 per year. The new equipment will allow the firm to increase production, and sales will increase by $270,000 per year.
Calculate the WACC of the project, and find the NPV of the project using the WACC as your discount rate.
The rate of inflation for the next twelve months (Year 1) is expected to be 1.4%; it is expected to be 1.8% the following year (Year Two); and it is expected to be 2.0% every year after Year Two. Assume the real risk-free rate, r*, is 3 percent for a..
When comparing common stock of the same company it is fair to say that all shares, no matter how many classes, are all created with the same equal rights. companies sometimes have two different classes of shares with unequal rights to dividends an..
Netscrape Communications does not currently pay a dividend. You expect the company to begin paying a $4 per share dividend in 14 years, and you expect dividends to grow perpetually at 5 percent per year thereafter. If the discount rate is 13 percent,..
How we measure risk is related to our perspective. The president of the company would look at the correlation between projects which is measured by the correlation coefficient. The shareholder would measure risk by looking at Beta. While the project ..
If you’re average daily balance on your credit card in June is $1,200 and your APR is 18%, how much interest do you pay the next billing cycle? If you also incurred a $29 late charge, what is now your effective interest rate?
The Jimmer Company has a historical growth in its free cash flows of 4% with little variability. With the addition of a new plant and equipment, however, you expect that free cash flows will grow 2% in year 1, 4% in year 2, 8% in years 3 to 5, and 5%..
Feeback Corporation stock currently sells for $30 per share. The market requires a return of 11.4 percent on the firm's stock. If the company maintains a constant 3.7 percent growth rate in dividends, what was the most recent dividend per share pa..
A factory forecasts to produce the following cash flows: Year 1 - $6516, Year 2 - $7000, Year 3 - $11400, Year 4 onward in perpetuity - $12000. If the cost of capital is 6%, what is the factory's present value?
Explain participating budgeting and slow budgeting.
A share of common stock has a current price of $82.50 and is expected to grow at a constant rate of 10 percent. If you require a 14% rate of return, what is the current dividend of this stock?
Personal thread, please comment on the financial management of organized health care delivery systems.
A trustworthy businessman, who has a sound reputation in importation of fruits and vegetables is looking to expand his business, but doesn’t have sufficient capital. On the expansion, he is willing to use his expertise if he can find someone to help ..
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