6. (12 points) Hawar is an all-equity firm with a current share price of $7.50 and 10million shares outstanding. The cost of capital for this unlevered firm is 10%. SupposeHawar are evaluating a project that requires an investment of $22 million today andprovides free cash flow of $2 million per year in perpetuity. This investment has thesame business risk as Hawar's existing projects. The corporate tax rate is 40%.(1) Imagine the firm proposes to raise $22 million to do the new project by issuingequity. What is the NPV of this project?(2) Alternatively, imagine that the firm finances the project with $22 million ofpermanent debt at a debt cost of capital of 6%. What is the NPV of the project in thiscase?(3) What will the share price be once the firm announces taking this project based onfinancing choice in (2)?

(1)The present value (PV) of the free cash flows is calculated using the formula for a perpetuity:…

Answered: 6. (12 points) Hawar is an all-equity…

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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Olsen Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and 35% debt, and its tax rate is 40%. Olsen must raise additional capital to fund it upcoming expansion. The firm will have $2 million of retained earnings with a cost of rs = 11%. New common stock in an amount up to $10,000 would have a cost of re = 12.5%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of rd = 9% and an additional $3 million of debt at rd = 11%. The CFO estimates that a proposed expansion would require an investment of $6.8 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.
8. CB Corp. is expected to generate net income of $40 million next year and will pay $20 million in after-tax interest expense next year. The company is expected to reinvest 20% of its after-tax operating earnings and will have return on capital (ROC) equal to 10% in perpetuity. If the weighted-average cost of capital for CB Corp. is 10% what is today's present value of the firm equal to? (a) $60 million. (b) $120 million. (c) $150 million. (d) $600 million.
Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of 51.54 million per year, growing at a rate of 2.4% per year. Goodyear has an equity cost of capital of 8,7%, a debt cost of capital of 6.7%, a marginal corporate tax rate of 38%, and a debt- equity ratio of 2.6. If the plant has average risk and Goodyear plans to maintain a constant debt equity ratio, what after tax amount must it receive for the plant for the divestiture to be profitable?
Wham Corp. is financed entirely by equity at the cost of 12%. The firm is expected to generate a level, perpetual stream of earnings of $1,000 per year. It operates in a perfect market except for taxation at the rate of 40%. (a) Compute the net cash flow per year and the value of the unlevered firm. (b) Now assume the firm borrows $3,000 at a debt cost of 8%. (c) Compute the value of the levered firm and account for the difference in your answer for the unlevered firm.
criticism. structure? Explain M-M Theory with their 5 The Holland Company expects perpetual earnings before interest and taxes (EBIT) of $4 6 million per year. The firm's after-tax, all-equity discount rate (ro) is 15%. Holland is subject to a corporate tax rate of 35%. The pretax cost of the firm's debt capital is 10% per annum, and the firm has $10 million of debt in its capital structure. i. ii. iii. Question: 7 What is Holland's value? What is Holland's cost of equity (rs)? What is Holland's weighted average cost of capital (Twacc)?
Bhupatbhai
Consider a firm with an EBITDA of $1,100,000 and an EBIT of $1,000,000. The firm finances its assets with $4,640,000 debt (costing 8.4 percent, all of which is tax deductible) and 214,000 shares of stock selling at $12 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,640,000 by selling additional shares of stock. The firm’s tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $1,000,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS.
Consider a firm with an EBITDA of $1,100,000 and an EBIT of $1,000,000. The firm finances its assets with $4,650,000 debt (costing 8.6 percent, all of which is tax deductible) and 216,000 shares of stock selling at $18 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,700,000 by selling additional shares of stock. The firm's tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $1,000,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Do not round intermediate calculations. Round your answers to 2 decimal places.) EPS before EPS after Changes in debt $ $ $ 2:19 1.80 0:40
Olsen Outfitters Inc. believes that its optimal capital structure consists of 55% common equity and 45% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $2 million of retained earnings with a cost of rs = 13%. New common stock in an amount up to $9 million would have a cost of re = 15.5%. Furthermore, Olsen can raise up to $3 million of debt at an interest rate of rd = 11% and an additional $3 million of debt at rd = 12%. The CFO estimates that a proposed expansion would require an investment of $5.6 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places. %
Your company is financed 20% with riskless debt with a yield of 6% and 80% with equity with a cost of 14%. The corporate tax rate is 30%. a. What is the company's WACC at its existing capital structure? b. What would be the new WACC if it changes to being 40% debt financed?
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 40% debt and 60% common equity. Its last dividend (Do) was $2.60, its expected constant growth rate is 4%, and its common stock sells for $30. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 11%, and Project B's return is 10%. These two projects are equally risky and about as risky as the firm's existing assets. a. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % b. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. -Select- % c. Which projects should Empire accept?
Olsen Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and 35% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $1 million of retained earnings with a cost of rs = 10%. New common stock in an amount up to $10 million would have a cost of re = 12.0%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of rd = 10% and an additional $4 million of debt at rd = 13%. The CFO estimates that a proposed expansion would require an investment of $8.4 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places. %

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