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Nally, Inc., is considering a project that will result in initial aftertax cash savings of $6.9 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt-equity ratio of .68, a cost of equity of 13.3 percent, and an aftertax cost of debt of 6.3 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects
Requirement 1: Calculate the WACC
Requirement 2: What is the maximum cost Nally would be willing to pay for this project?
BetterPie Industries has 6 million shares of common stock outstanding, 4 million shares of preferred stock outstanding, and 15,000 bonds. Assume the common shares are selling for $47 per share, the preferred shares are selling for $24.50 per share, a..
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Thatcher Corporation's bonds will mature in 11 years. The bonds have a face value of $1,000 and an 9% coupon rate, paid semi annually. The price of the bonds is $1,050. The bonds are callable in 5 years at a call price of $1,050. What is their yield ..
Assume your firm has multiple investments to consider each with differing risk levels. How can differing risk levels be incorporated into NPV analysis? How can they be incorporated into IRR analysis?
The real risk free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year treasury security yields 6.2%. What is the maturity risk premium for the 2-year security?
An asset has had an arithmetic return of 10.5 percent and a geometric return of 8.5 percent over the last 94 years. What return would you estimate for this asset over the next 12 years? 18 years? 32 years?
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