An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $96 million in free cash flow every year for five years, at which time it will be abandoned. A buyout firm proposes to purchase the company for $310 million financed with $260 million in compound interest debt to be repaid in five, equal, end-of-year payments and carrying an interest rate of 7.5 percent. 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 %

An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $96 million in free cash flow every year for five years, at which time it will be abandoned. A buyout firm proposes to purchase the company for $310 million financed with $260 million in compound interest debt to be repaid in five, equal, end-of-year payments and carrying an interest rate of 7.5 percent. 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 %

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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Heedy Inc. is considering a capital investment proposal that costs $460,000 and has an estimated life of four years, and no residual value. The estimated net cash flows are as follows: Net Cash Flow $195,000 160,000 120,000 80,000 Year 1 2 3 4 The minimum desired rate of return for net present value analysis is 10%. The present value of $1 at compound interest rates of 10% for 1, 2, 3, and 4 years is 0.909, 0.826, 0.751, and 0.683, respectively. Determine the net present value. Enter negative values as negative numbers. 5,825 X
10. RiverRocks (whose WACC is 12.7%) is considering an acquisition of Raft Adventures (whose WACC is 14.8%). The purchase will cost $100.2 million and will generate cash flows that start at $15.9 million in one year and then grow at 4.5% per year forever. What is the NPV of the acquisition? The net present value of the project is $____million. (Round to two decimal places.)
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…
RiverRocks (whose WACC is 12.7%) is considering an acquisition of Raft Adventures (whose WACC is 15.3%). The purchase will cost $100.5 million and will generate cash flows that start at $14.1 million in one year and then grow at 4.2% per year forever. What is the NPV of the acquisition? The net present value of the project is $ million. (Round to two decimal places.)
DEF Corporation is considering a business opportunity that would require an investment of P1,800,000 with an expected life of 10 years. Estimated annual cash inflows for 10 years, net of tax, amounts to P500,000. The salvage value is expected to be P700,000 at the end of the 1st year, P550,000 at the end of the 2nd year, P450,000 at the end of the 3rd year, P400,000 at the end of the 4th year, and will decrease by P50,000 every year starting the end of the fifth year. Compute the bailout period.
You are making a proposal to start a corporation that would require invested capital of P9,000,000 but will provide annual earnings of P1,500,000 every year. The capital will be from an 8%- interest, P2,500,000-face value perpetual bonds and the balance from equity requiring a rate of return of 15%. How much is the value of goodwill based on this forecast?

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