6. Lucron Corp. is considering a project that will cost $310,000 and will generate after-tax cash flows of $96,000 per year for 5 years. The firm's WACC is 12% and its target D/E ratio is 2/3. The flotation cost for debt is 4% and the flotation cost for equity is 8%. What would be the new cost of the project after adjusting for flotation costs? A) $328,390 $329,787 $331,197 D) $329,840 E) $290,160
6. Lucron Corp. is considering a project that will cost $310,000 and will generate after-tax cash flows of $96,000 per year for 5 years. The firm's WACC is 12% and its target D/E ratio is 2/3. The flotation cost for debt is 4% and the flotation cost for equity is 8%. What would be the new cost of the project after adjusting for flotation costs? A) $328,390 $329,787 $331,197 D) $329,840 E) $290,160
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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This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Question
Transcribed Image Text:6. Lucron Corp. is considering a project that will cost $310,000 and will generate after-tax cash
flows of $96,000 per year for 5 years. The firm's WACC is 12% and its target D/E ratio is 2/3.
The flotation cost for debt is 4% and the flotation cost for equity is 8%. What would be the
new cost of the project after adjusting for flotation costs?
A) $328,390
B$329,787
$331,197
D) $329,840
E) $290,160
7. When calculating weights for the WACC, it has become relatively common to use Net Debt.
How is Net Debt calculated?
A) Net Debt = Total amount of debt - Cash & Risk-Free Securities
B) Net Debt = Total amount of debt + Cash & Risk-Free Securities
C) Net Debt = Long-term Debt - Short-term Debt
D) Net Debt Short-term Debt-Long-term Debt
E) Net Debt- Long-term Debt-Short-term Debt + Cash & Risk-Free Securities
Please use the following information to answer the next THREE questions.
LNZ Corp. is thinking about leasing equipment to make tinted lenses. This equipment would cost
$3,400,000 if purchased. The CCA rate on the equipment is 40% and the salvage value after its
five-year life will be $350,000. There are no capital gains to worry about. The firm's corporate tax
rate is 40% and its pre-tax cost of debt is 12%. WeLease Corp. has offered to lease the system to
LNZ for payments of $710,000 per year for five years. These lease payments would be made at
the START of the year. Assume that the tax deductibility benefit of the lease payments occurs at
the same time the lease payments are made.
8. What is the present value of the after-tax lease payments?
A) $1,737,390
B) $2,895,617
C) $1,862,461
D) $1,719,911
E) $2,866,518
3
D) -S772,875
E) $369,968
9. Pretend that your answer to the previous question was exactly $2,000,000. If the present value
of the CCA tax shield on the equipment is $1,030,032, what would be the NAL for LNZ?
A) $385,372
B) $122,742
C) $402,831
Page 3 of 9
10. Now suppose that there are maintenance costs on the equipment of $30,000 per year for five
years (paid at year end). These costs would have to be paid by the firm if they purchase the
equipment, but if they lease it instead, the maintenance costs are already included in the lease
payment. How would these maintenance costs affect the NAL for LNZ?
A) The NAL would decrease by $30,000.
B) The NAL would decrease by $73,410.
C) The NAL would increase by $30,000.
D) The NAL would increase by $73,410.
E) The NAL would not be affected.
Please use the following information to answer the next TWO questions.
Your firm will either purchase or lease a new fabricator. If purchased, the fabricator will cost
$940,000 and be depreciated for tax purposes on a straight-line basis over five years. The fabricator
has no residual value at the end of the five years Your firm can also lease the fabricator for five
years (payments are made at the start of the year). The firm can borrow at 15% pre-tax. Assume
that the tax deductibility benefit of the lease payments occurs at the time the lease payments are
made.
11. If the firm's corporate tax rate is 40%, what would the before-tax lease payment have to be to
make your firm indifferent between leasing and buying the fabricator?
A) $166,467
(B) $254,537
C) $152,722
D) $277,445
E) There is not enough information.
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