13. As a consultant to First Responder Inc., you have obtained the following data (dollars in millions). The company plans to pay out all of its earnings as dividends, hence g = 0. Also, no net new investment in operating capital is needed because growth is zero. The CFO believes that a move from zero debt to 15.0% debt would cause the cost of equity to increase from 10.0% to 13.0%, and the interest rate on the new debt would be 9.0%. What would the firm's total market value be if it makes this change? Hints: Find the FCF, which is equal to NOPAT = EBIT(1 - T) because no new operating capital is needed, and then divide by (WACC - g). Do not round your intermediate calculations. Oper. income (EBIT) $800 Таx rate 40.0% New cost of equity (rs) 13.00% New wd 15.0% Interest rate (rd) 9.00% a. $4,047 b. $4,371 c. $3,076 d. $3,966 e. $4,452 14. Carlyle Inc. is considering two mutually exclusive projects. Both require an initial investment of $14,800 at t= 0. Project S has an expected life of 2 years with after-tax cash inflows of S6,900 and S13,900 at the end of Years 1 and 2, respectively. In addition, Project S can be repeated at the end of Year 2 with no changes in its cash flows. Project L has an expected life of 4 years with after-tax cash inflows of $5,600 at the end of each of the next 4 years. Each project has a WACC of 9%. What is the equivalent annual annuity of the most profitable project? a. 1,093.61 b. 1,835.94 c. 1,725.79 d. 1,031.70 е. 1,523.83 15. Warr Company is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC or negative, in both cases it will be rejected. Year 1 3 4 Cash flows -S1579 $400 $400 $400 $400 a. 0.56% b. 0.43% c. 0.53% d. 0.50% e. 0.41%
13. As a consultant to First Responder Inc., you have obtained the following data (dollars in millions). The company plans to pay out all of its earnings as dividends, hence g = 0. Also, no net new investment in operating capital is needed because growth is zero. The CFO believes that a move from zero debt to 15.0% debt would cause the cost of equity to increase from 10.0% to 13.0%, and the interest rate on the new debt would be 9.0%. What would the firm's total market value be if it makes this change? Hints: Find the FCF, which is equal to NOPAT = EBIT(1 - T) because no new operating capital is needed, and then divide by (WACC - g). Do not round your intermediate calculations. Oper. income (EBIT) $800 Таx rate 40.0% New cost of equity (rs) 13.00% New wd 15.0% Interest rate (rd) 9.00% a. $4,047 b. $4,371 c. $3,076 d. $3,966 e. $4,452 14. Carlyle Inc. is considering two mutually exclusive projects. Both require an initial investment of $14,800 at t= 0. Project S has an expected life of 2 years with after-tax cash inflows of S6,900 and S13,900 at the end of Years 1 and 2, respectively. In addition, Project S can be repeated at the end of Year 2 with no changes in its cash flows. Project L has an expected life of 4 years with after-tax cash inflows of $5,600 at the end of each of the next 4 years. Each project has a WACC of 9%. What is the equivalent annual annuity of the most profitable project? a. 1,093.61 b. 1,835.94 c. 1,725.79 d. 1,031.70 е. 1,523.83 15. Warr Company is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC or negative, in both cases it will be rejected. Year 1 3 4 Cash flows -S1579 $400 $400 $400 $400 a. 0.56% b. 0.43% c. 0.53% d. 0.50% e. 0.41%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Stock or equities are generally sold and bought in the Stock Exchange or which is popularly known as the stock market. Stocks are issued in the Stock Exchange for the sole purpose of raising funds for the Corporation or the company itself. Now since an individual has purchased a portion of the Corporation or company, he or she may claim to be a part of the earnings or profit of the company.
Question
Transcribed Image Text:13. As a consultant to First Responder Inc., you have obtained the following data (dollars in millions). The company plans
to pay out all of its earnings as dividends, hence g = 0. Also, no net new investment in operating capital is needed because
growth is zero. The CFO believes that a move from zero debt to 15.0% debt would cause the cost of equity to increase
from 10.0% to 13.0%, and the interest rate on the new debt would be 9.0%. What would the firm's total market value be if
it makes this change? Hints: Find the FCF, which is equal to NOPAT = EBIT(1 - T) because no new operating capital is
needed, and then divide by (WACC - g). Do not round your intermediate calculations.
Oper. income (EBIT)
$800
Таx rate
40.0%
New cost of equity (rs)
13.00%
New wd
15.0%
Interest rate (rd)
9.00%
a. $4,047
b. $4,371
c. $3,076
d. $3,966
e. $4,452
14. Carlyle Inc. is considering two mutually exclusive projects. Both require an initial investment of $14,800 at t = 0.
Project S has an expected life of 2 years with after-tax cash inflows of S6,900 and S13,900 at the end of Years 1 and 2,
respectively. In addition, Project S can be repeated at the end of Year 2 with no changes in its cash flows. Project L has an
expected life of 4 years with after-tax cash inflows of $5,600 at the end of each of the next 4 years. Each project has a
WACC of 9%. What is the equivalent annual annuity of the most profitable project?
a. 1,093.61
b. 1,835.94
с. 1,725.79
d. 1,031.70
e. 1,523.83
15. Warr Company is considering a project that has the following cash flow data. What is the project's IRR? Note that a
project's projected IRR can be less than the WACC or negative, in both cases it will be rejected.
Year
1
3
4
Cash flows
-S1579
$400
$400
$400
$400
a. 0.56%
b. 0.43%
c. 0.53%
d. 0.50%
e. 0.41%
16. Atlas Corp. is considering two mutually exclusive projects. Both require an initial investment of $9,000 at t = 0.
Project S has an expected life of 2 years with after-tax cash inflows of S6,400 and S8,500 at the end of Years 1 and 2,
respectively. Project L has an expected life of 4 years with after-tax cash inflows of $4,151 at the end of each of the next 4
years. Each project has a WACC of 9.25%, and Project S can be repeated with no changes in its cash flows. The controller
prefers Project S, but the CFO prefers Project L. How much value will the firm gain or lose if Project L is selected over
Project S, i.e., what is the value of NPVL - NPVS?
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