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![Licola, Inc. is currently an all-equity firm and has just announced plans to expand its
current operations. To fund this expansion, Licola needs to raise $225 million in new
capital. Following the expansion, Licola is expected to generate earnings before
interest and taxes of $100 million per year in perpetuity. Although Licola has already
announced the planned expansion, it has not yet determined how best to fund the
expansion. The firm currently has 30 million shares outstanding and following the
expansion announcement, its shares are now trading at $30 per share. Licola can
borrow at a rate of 10% or issue new equity at $30 per share. Assume that all
earnings are paid as dividends. If Licola chooses to finance its expansion by issuing
new stock, its cost of equity will be closest to:
4.05%
5.64%
7.07%
8.89%
O None of the above](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7238229d-b43a-49cf-bef1-d22ab7706c91%2F3bf0ef0a-4049-4e49-b8f4-7474ec6e6846%2F08rd26c_processed.jpeg&w=3840&q=75)
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- Rachel Foundation, Inc., a tax-exempt organization duly registered with the Securities and Exchange Commission, is planning to invest P280,000 in a project at the beginning of 2022. The estimated annual cash savings from this project is P90,000. The project will be depreciated over its five-year life on a straight-line basis. The foundation’s desired rate of return on investments of this type is 10%. 1. Using the built-in Excel formula, the present value of cash savings is: (Round off to the nearest whole number) 2. Based on your answer above, the investment project’s net present value is? 3. The investment project’s payback period is?A start-up company Amazonian.com is considering expanding into new product markets. The expansion will require an initial investment of $160 million and is expected to generate perpetual EBIT of $40 million per year. After the initial investment, future capital expenditures are expected to equal depreciation, and no further additions to net working capital is anticipated. Amazonian.com’s existing capital structure is composed of equity with a market value of $500 million and debt with a market value of $300 million, and has 10 million shares outstanding. The unlevered cost of capital for Amazonian.com is 10%, and Amazonian.com’s debt is risk free with an interest of 4%. The expansion into the new product market will have the same business risk as Amazonian.com’s existing assets. The corporate tax rate is 35%, there are no personal taxes or costs of financial distress. a) Amazonian.com initially proposes to fund the expansion by issuing equity. If investors were not expecting this…Montclair Company is considering a project that will require a $500,000 loan. It presently has total liabilities of $220,000 and total assets of $620,000. 1. Compute Montclair’s (a) current debt-to-equity ratio and (b) the debt-to-equity ratio assuming it borrows $500,000 to fund the project. 2. If Montclair borrows the funds, does its financing structure become more or less risky?
- Montclair Company is considering a project that will require a $520,000 loan. It presently has total liabilities of $210,000 and total assets of $630,000. 1. Compute Montclair's (a) current debt-to-equity ratio and (b) the debt-to-equity ratio assuming it borrows $520,000 to fund the project. 2. If Montclair borrows the funds, does its financing structure become more or less risky? 1. (a) 1. (b) 2. 1 Choose Denominator: 1 1 1 If Montclair borrows the funds, does its financing structure become more or less risky? Choose Numerator: Debt-to-Equity RatioThe finance manager of the GZA Ltd is considering a recapitalization plan that would convert GZA from its current all-equity capital structure to one including substantial financial leverage. -GZA now has 10,000,000 ordinary shares outstanding, which are selling for $15 each, and the company’s EBIT is expected to be $12,000,000 per year for the foreseeable future. -The recapitalization proposal is to issue $60,000,000 worth of long-term, perpetual debt at an annual interest rate of 3.0% and use the proceeds to repurchase 4,000,000 ordinary shares worth $60,000,000. Assume perfect capital markets with no market frictions such as corporate or personal income taxes. Calculate the earnings per share and expected return on equity for GZA’s shareholders under both the current all-equity capital structure and under the recapitalization plan.LAGER Ltd, a listed company, has had the following balance sheets from 2016 to 2018 (reported in $million). LAGER is considering to invest $25 million in a new fixed asset, and has asked you, a banker to LAGER, to finance the entirety of this amount by a five years loan. Required: a) Assuming the need to invest $25 million was well founded, would you, from a pure risk perspective, approve the loan? Why and why not? Justify your analysis with the appropriate financial ratios. b) What other factors you would consider in addition to the financial performance in part (a) to grant the loan to LAGER Ltd.? Why? LAGER Ltd. Financial Data 2016 2017 2018 2016 2017 2018 Fixed assets 70 98 138 30 30 Paid up Capital Retained 30 42 56 earnings 28 39 55 Inventory Acct Long Term 3650 70 59 84 133 receivables debt Marketable Account 11 4 7 21 29 41 securities payable Short Cash 1 2 1 68 11 Term debt Total Assets 146 193 271 Total Liabilities 146 193 271
- A corporation decides whether to undertake a project that requires an investment of $150 million now (in 2022) and of $100 million in 2023. The project will bring $50 million in 2024, $100 million in 2025, and $150 million in 2026. Find the NPV (i.e., the net present value) of the project and recommend whether the company should or should not pursue the project if the relevant interest rate is 7%.Newkirk is considering the construction of a new facility in Oklahoma. The facility will cost Newkirk $500 million capital. The firm is considering a target debt-to-equity ratio of 0.25 for this project. Newkirk has two financing options: 1) corporate financing, where the debt capital needed comes from corporate debt; or 2) project financing, through nonrecourse debt of the new entity Oklahoma Plan. The company current has total assets of $1,800 million, including $800 million of debt and $1,000 million of equity. Prepare abbreviated balance sheets for the following: a. Newkirk before the investment facility b. Newkirk after the investment of the facility if corporate financing is used c. Newkirk and the Oklahoma Plant, if project financing is usedThe following information relates to a proposed four-year project which is being financially evaluated by the Board of Directors of Pampass Inc. (Pampass). Pampass is an unlisted company but shareholders include private investors, a venture capital company, an insurance company and a pension fund. The initial investment is $7.8 million, with scrap value of $0.2 million and the following net cash inflows for each of the four years: Year 2021 2022 2023 2024 Net operating cash flow ($m) 2.40 3.00 3.20 3.16 The Board of Directors believes that this project will increase shareholder wealth if it achieves an accounting rate of return (ARR) greater than 20%. As a matter of policy, the Board requires all investment projects to be evaluated using both ARR and payback period. Shareholders have recently criticised the Board of Directors for using these investment appraisal methods, claiming that Pampass should be using the net present value method. The directors’…
- Use the following information to answer the question(s) below. Taggart Transcontinental is considering a $250 million investment to launch a new rail line. The project is expected to generate a free cash flow of $32 million per year, and its unlevered cost of capital is 8%. Taggart's corporate tax rate is 21%. Taggert has 4 million shares of stock outstanding. Assuming that to fund the investment Taggart will take on $250 million in permanent debt and ignoring issuance costs, the NPV of Taggart's new rail line is closest to: A. $195 million. B. $203 million. C. $243 million. D. $235 million.VijayPlease show proper steps and explanation thanks!
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