Acme Corp has a target debt/equity ratio of 0.30. It was $300 million in bonds outstanding with a yield of 6% and 50 million shares of stock outstanding with a current market price of $20 per share. The company's beta is 1.18 and the risk-free rate of interest is 4% with a market risk premium of 6%. The firm has a tax rate of 25%. The company is looking to raise $200 million to build a second factory. The new factory will increase output substantially. The table below shows the anticipated cash flows generated from the new factory including a salvage value in year 5. What is the payback for this project? Year Cash Flow ($milI) -200 1 35 2 45 3 55 4 65 5 95 4 Years 3.75 Years 3.5 Years 4.25 Years

Acme Corp has a target debt/equity ratio of 0.30. It was $300 million in bonds outstanding with a yield of 6% and 50 million shares of stock outstanding with a current market price of $20 per share. The company's beta is 1.18 and the risk-free rate of interest is 4% with a market risk premium of 6%. The firm has a tax rate of 25%. The company is looking to raise $200 million to build a second factory. The new factory will increase output substantially. The table below shows the anticipated cash flows generated from the new factory including a salvage value in year 5. What is the payback for this project? Year Cash Flow ($milI) -200 1 35 2 45 3 55 4 65 5 95 4 Years 3.75 Years 3.5 Years 4.25 Years

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

See similar textbooks

Similar questions

Consider this case: Globex Corp. currently has a capital structure consisting of 30% debt and 70% equity. However, Globex Corp.'s CFO has suggested that the firm increase its debt ratio to 50%. The current risk-free rate is 3.5%, the market risk premium is 7.5%, and Globex Corp.'s beta is 1.15. If the firm's tax rate is 25%, what will be the beta of an all-equity firm if its operations were exactly the same? Now consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 10%, and its tax rate is 25%. It currently has a levered beta of 1.15. The risk-free rate is 3.5%, and the risk premium on the market is 7.5%. US Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm's level of debt will cause its before-tax cost of debt to increase to 12%. First, solve for US Robotics Inc.'s unlevered beta. Use US Robotics Inc.'s unlevered beta to solve…
Suppose you are estimating the WACC for Columbus Inc. It has the following data from its balance sheet: total debt = $200 million; total equity=$120 million. It has 20 million shares outstanding, and its stock is trading at $32 per share. Your analysis shows that the company's current borrowing rate is 7%, and that the cost of equity is 13%. If the company marginal tax rate is 30%, what is its WACC?
Jenkins, Inc., has equity with a market value of $22.6 million and debt with a market value of $11.3 million. The cost of debt is 8 percent per year. Treasury bills that mature in one year yield 4 percent per year, and the expected return on the market portfolio over the next year is 10 percent. The beta of the company's equity is 1.11. The firm pays no taxes. a. What is the company's debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the company's weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the cost of capital for an otherwise identical all-equity firm? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Debt-equity ratio b. Weighted average cost of capital C. Cost of capital 0.50 % %
Johnson Tire Distributors has debt with both a face and a market value of $90,000,000. This debt has a coupon rate of 7 percent and pays interest annually. The expected earnings before interest and taxes is a constant $50,000,000 in perpetuity. The company's tax rate is 25 percent, and the unlevered cost of capital is 25 percent. What is the firm's cost of equity? Write your answer as a percent rounded to two digits, but don't include the % sign (i.e. enter 12.63, not 0.1263). HINT: You need to use both M&M propositions. Numeric Response
On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $25 million in new projects. The firm's present market value capital structure, shown below, is considered to be optimal. Assume that there is no short-term debt. Debt $30,000,000 Common equity 30,000,000 Total capital $60,000,000 New bonds will have an 9% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so $1.20/$30 = 4%.) The marginal corporate tax rate is 35%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet In order to maintain the present capital structure, how much of the…
A firm is currently an all equity firm that has 510,000 shares of stock outstanding with a market price of $53.60 a share. The current cost of equity is 10.5 percent and the tax rate is 25 percent. The firm is considering adding $7.10million of debt with a coupon rate of 6 percent to its capital structure. The debt will be sold at par value. What is the levered value of the equity ?
Company XYZ is funded with $500 million equity and $475 million debt. The yield on bonds issued by XYZ is 7.85%. Its beta is 1.15 and the tax rate is 40%. The risk-free rate is 5% with the market risk premium 9%. The weighted average cost of capital for this firm is 10.17% 11.02% 12.02% 12.85% 13.60%
Kaur Resources is an unlevered firm with a total market value of $460,000 and 10, 000 shares of stock outstanding. The firm has expected EBIT of $22, 000 if the economy is normal and $35, 000 if the economy booms. The firm is considering a bond issue of $73, 600 with an attached interest rate of 6.8 percent. The bond proceeds will be used to repurchase shares. The tax rate is 21 percent. What will be the earnings per share after the repurchase if the economy is normal? Multiple Choice $2.02 $1.70 $1.60 $2.62 $1.34
Rolex, Inc. has equity with a market value of $20 million and debt with a market value of $10 million. Assume the firm has no default risk and can borrow at the risk-free interest rate. The risk-free interest rate is 5 percent per year, and the expected return on the market portfolio is 11 percent. The beta of the company's equity is 1.2. The tax rate is 20%. What is the cost of capital for an otherwise identical all-equity firm?
Running Shoes, Inc. has 2 million shares of stock outstanding. The stock currently sells for $15 per share. The firm's debt is publicly traded and has five years until maturity. The current value of the firm's bonds is $14.1016 million with a yield to maturity of 8%. The risk free rate is 2% and the market risk premium is 9%. You've estimated that the firm has a beta of 1.7. The corporate tax rate is 30%. Hint: find the market value of the debt. What percentage of Running Shoes, Inc. is financed with debt? (Answer in decimal form)
The company you work for wants you to estimate the company’s WACC; but before you do so, you need to estimate the cost of debt and equity. You have obtained the following info. 1) the firms non-callable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000 and a market price of $1,225.00. 2) the company’s tax rate is 40%. 3)the risk-free rate is 4.50%, the market risk premium is 5.50%, and the stocks beta is 1.20. 4) the target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any common stock. WHAT is the WACC?
Suppose you are estimating the WACC for Columbus Inc. It has the following data from its balance sheet: total debt = $290 million; total equity=$60 million. It has 20 million shares outstanding, and its stock is trading at $32 per share. Your analysis shows that the company's current borrowing rate is 7%, and that the cost of equity is 13%. If the company marginal tax rate is 30%, what is its WACC?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS