a. Calculate the annual debt-service payments required on the debt. b. Ignoring taxes, estimate the rate of return to the buyout firm on the acquisition after debt service. Note: Round your answers to 1 decimal place. a. Annual debt service payment b. Rate of return million %
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- Gemini, Inc., an all-equity firm, is considering a $1.7 million investment that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $595,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 9.5 percent loan to finance the project from a local bank. They will receive the total amount needed for investment ($1.7 million at time 0 and all principal will be repaid in one balloon payment at the end of the fourth year (similar to a bond). Every year the company would need to pay interest (@9.5%). If the company finances the project entirely with equity, the firm’s cost of capital would be 13 percent. The corporate tax rate is 30 percent. Calculate the cash flows and NPV for the two cases:A company has the option to invest in project A, project B, or neither (the projects are mutually exclusive and the company has no other investment options). Project A requires an initial investment of $100,000 today and provides cash flows of $30,000 a year for five years. Project B requires a $875,000 investment today and will have cash flows of $200,000 a year for 4 years, with a final cashflow of $300,000 in year 5. The firm's hurdle rate (discount rate) for these projects is 8%. Which project should be selected? O (a) A (b) В (c) NeitherKnotts, Incorporated, an all-equity firm, is considering an investment of $1.89 million that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $616,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 9.6 percent loan to finance the project from a local bank. All principal will be repaid in one balloon payment at the end of the fourth year. The bank will charge the firm $66,000 in flotation fees, which will be amortized over the four-year life of the loan. If the company financed the project entirely with equity, the firm's cost of capital would be 11 percent. The corporate tax rate is 25 percent. Using the adjusted present value method, calculate the APV of the project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,…
- Kohwe Corporation plans to issue equity to raise $50.7 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10.4 million each year. Kohwe's only asset is this investment opportunity. Suppose the appropriate discount rate for Kohwe's future free cash flows is 7.7%, and the only capital market imperfections are corporate taxes and financial distress costs. a. What is the NPV of Kohwe's investment? b. What is the value of Kohwe if it finances the investment with equity? a. What is the NPV of Kohwe's investment? The NPV of Kohwe's investment is $ million. (Round to two decimal places.) b. What is the value of Kohwe if it finances the investment with equity? The Kohwe finances stment with equity $ million. (Round decimal places.)The Hamilton company wants to acquire another company at a cost of $10,000. The new company will add cash flows of $2,000 in year 1, $4,000 in year 2, $3,000 in year 3, $3,000 in year 4 and $4,000 in year 5. Assuming Hamilton has a discount rate of 10% and a payback requirement of 3.75 years, should the company do the investment according to simple payback and IRR?CII, Incorporated, invests $700,000 in a project expected to earn a 9% annual rate of return. The earnings will be reinvested in the project each year until the entire investment is liquidated 11 years later. What will the cash proceeds be when the project is liquidated? (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Round your "FV of a single amount" to 4 decimal places and final answer to the nearest whole dollar.) Present Value X f (FV of a Single Amount) Future Value
- The firm gets 100% of its capital from common stock. The equity holder’s required rate of return is 10% and the firm’s tax rate is 0%. The project involves an immediate investment of $13,000 for the purchase and installation of equipment. The equipment will be depreciated straight-line, over 4 years, down to a salvage value of $ 0. The project is expected to generate operating cashflows [=ebit(1-t)+dep] in the amount of $4,200 at the end of each of the next four years. Assume that at the end of the fourth year the related equipment is sold which generates an additional after-tax cashflow of $1,800. What is the weighted average cost of capital (WACC)? What are the total cashflows for each year (please indicate positive or negative)?A 5-year project will require an investment of $100 million. This comprises of plant andmachinery worth $80 million and a net working capital of $20 million. The entire outlay willbe incurred at the project’s commencement.Financing for the project has been arranged as follows:80,000 new common shares are issued, the market price of which is $500 per share. Theseshares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9%per year for an indefinite tenure.Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having aface value of $1,000. These bonds now have a market value of $1,150 each.At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the networking capital will be liquidated at its book value.The project is expected to increase revenues of the firm by $120 million per year. Expenses,other than depreciation, interest and tax, will amount to $80 million per year. The firm is subjectto…A 5-year project will require an investment of $100 million. This comprises of plant andmachinery worth $80 million and a net working capital of $20 million. The entire outlay willbe incurred at the project’s commencement.Financing for the project has been arranged as follows:80,000 new common shares are issued, the market price of which is $500 per share. Theseshares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9%per year for an indefinite tenure.Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having aface value of $1,000. These bonds now have a market value of $1,150 each.At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the networking capital will be liquidated at its book value.The project is expected to increase revenues of the firm by $120 million per year. Expenses,other than depreciation, interest and tax, will amount to $80 million per year. The firm is subjectto…
- The firm gets 100% of its capital from common stock. The equity holder’s required rate of return is 10% and the firm’s tax rate is 0%. The project involves an immediate investment of $13,000 for the purchase and installation of equipment. The equipment will be depreciated straight-line, over 4 years, down to a salvage value of $ 0. The project is expected to generate operating cashflows [=ebit(1-t)+dep] in the amount of $4,200 at the end of each of the next four years. Assume that at the end of the fourth year the related equipment is sold which generates an additional after-tax cashflow of $1,800. 5.What is the weighted average cost of capital(WACC)? 6. What are thetotal cashflows for each year (please indicate positive or negative)? 0 1 2 3 4 Total Cashflow 7. What is the net present value (NPV) of the project?A 5-year project will require an investment of $100 million. This comprises of plant andmachinery worth $80 million and a net working capital of $20 million. The entire outlay willbe incurred at the project’s commencement.Financing for the project has been arranged as follows:80,000 new common shares are issued, the market price of which is $500 per share. Theseshares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9% per year for an indefinite tenure.Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having a face value of $1,000. These bonds now have a market value of $1,150 each.At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the net working capital will be liquidated at its book value.The project is expected to increase revenues of the firm by $120 million per year. Expenses,other than depreciation, interest and tax, will amount to $80 million per year. The firm is…A 5-year project will require an investment of $100 million. This comprises of plant andmachinery worth $80 million and a net working capital of $20 million. The entire outlay willbe incurred at the project’s commencement.Financing for the project has been arranged as follows:80,000 new common shares are issued, the market price of which is $500 per share. Theseshares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9%per year for an indefinite tenure.Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having aface value of $1,000. These bonds now have a market value of $1,150 each.At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the networking capital will be liquidated at its book value.The project is expected to increase revenues of the firm by $120 million per year. Expenses,other than depreciation, interest and tax, will amount to $80 million per year. The firm is subjectto…