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GeKay Inc. is considering a new $30m project. Its CFO, Mr. Smith, has brought you in as a consultant to advise him as to whether the project should be undertaken. First, you note that this project would have the same risk as that of GeKay's existing businesses. Further, you estimate the project's unlevered pre-tax cash flows to be $3m per year indefinitely. Mr. Smith has already decided that if he undertakes the project, he will finance the entire $30m with a new issue of 10-year bonds, at the company's pre-tax cost of debt of 6%. He also assumes that he will keep refinancing this debt indefinitely with new debt issues. Do you advise him to undertake the project? Additional data is given below:
GeKay's common stock outstanding = 10m shares
GeKay's capitalization = $500m
GeKay s (levered) β = 0.80
GeKay's c target debt ratio =0.35
GeKay's tax rate = 35%
Risk-free rate = 4%
The market's equity risk premium = 5%
Compute the Weighted Average Cost of Capital for the firm given that the firm can borrow from the bank. The balance sheet shows that there is $300 million of shareholder equity, and $100 million of long-term debt.
betas of individual securities - weighted average of the betas of individual securities.
Coastal Carolina Company produces a single product. the projected income statement for the coming year, based on sales of 100,000 units, is as follows: Sales 2,000,000 Less:Variable costs 1,000,000 contribution margin 900,000 less: fixed costs 765..
Required rate of return on comparable quality preferred stocks is 14 percent, calculate the value of Fridge-Air's preferred stock.
question 1nbsp why do firms compute weighted-average costs of capital?question 2nbsp you need to estimate the value of
Build a Balanced Scorecard for the unit of the organization for which you work, or have worked. Unless you are in senior management, focus on the unit with which you are most familiar rather than the organization as a whole
You have created the given income statement for the Hugo Bass Company. It represents the most recent year's operations, which ended by tomorrow.
Effect of leverage on creditors and share holders - As the firm levers up, how does the increase in value get apportioned between the creditors and the shareholders?
A stock has a beta of 1.2 and the standard deviation of its returns is 25%. The market risk premium is five percent and the risk-free rate is four percent.
What is the reason for the difference in the yields and are any of the yield curves positively sloped? If not, are any of them inverted?
Each organization listed has grown significantly over the past 5 years. As a result of the growth, the organization has hired you to advise it on its information technology needs.
Calculate the gain or loss as a percentage of your original investment for each note and bond and calculate the gain or loss as a percentage of your original investment for each note and bond.
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