Barb is asked to analyze a new software firm. This year the firm has total revenues of $110 millionand expenses (excluding interest payments) of $50 million. The firm has $90 million of capital, ofwhich $30 million is in debt financed at an 8% annual interest rate and the rest is equity. Barbestimates that the cost of equity capital here is 15%. Barb determines this firm has accounting profiof[Select][Select]economic profit of [Select]a good use of capital.くand

1. Accounting Profit:Accounting Profit =Total Revenues −Expenses −Interest PaymentsTotal Revenues =…

Answered: Barb is asked to analyze a new software…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 13P

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An industrial firm with assets of $100 million is exploring the benefit of leveraging the balance sheet given expectations of economic growth. Currently, the firm is earning a return on assets of 9.00%, a return on equity of 15.00%, retains a debt ratio of 40% (equity to assets of 60%). The board of directors has requested management consider changing the debt ratio to 60% (equity to assets of 40%). The new debt will cost 4.00% given a credit rating downgrade. The firm will apply the proceeds of new debt to repurchase stock at book value. The firm is taxed @ 20% but expects that rate to rise in the future. First, estimate how the change in capital structure will impact pro forma net income, return on assets, and return on equity. Second, briefly indicate the advantages and risks of relying on additional debt to leverage the balance sheet.
Lana is thinking about making an iventment in a new venture called BluePearl - after performing an analysis of similar firms, she discovered several other firms (3) with the following Enterprise Value to FCF ratios: Firm 1: 5.9 Firm 2: 7.6 Firm 3: 9.1 The cashflows for BluePearl this year are expected to be $1,300,000. If BluePearl doesn't have any debt or cash currently, and 700,000 shares outstanding - what is the Price Per Share for BluePearl?
As the general manager of a firm, you are presented with an investment proposal from one of your divisions. Its net present value, if discounted at the cost of capital for your firm (which is 15 percent), is $ 1 00,000, and its internal rate of return is 20 percent. (a) What are the economic interpretations of the net present value and internal rate of return figures? In other words, what do they mean? (b) What, if any, additional information would you like to have before approving the project?
Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1,000,000 in a start-up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data for the past year’s operations of the two firms he is considering and give him some business advice. Company Name Larson Benson Variable cost per unit (a) $ 18.00 $ 9.00 Sales revenue (8,900 units × $29.00) $ 258,100 $ 258,100 Variable cost (8,900 units × a) (160,200 ) (80,100 ) Contribution margin $ 97,900 $ 178,000 Fixed cost (24,700 ) (104,800 ) Net income $ 73,200 $ 73,200 Required Use the contribution margin approach to compute the operating leverage for each firm. If the economy expands in coming years, Larson and Benson will both enjoy a 11 percent per year increase in sales, assuming that the selling price remains unchanged. Compute the change in net income for…
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 30% long-term debt, 10% preferred stock, and 60% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 23%. Debt : The firm can sell for $1030 a 14-year, $1,000-par-value bond paying annual interest at a 8.00% coupon rate. A flotation cost of 2% of the par value is required. Preferred stock: 9.00% (annual dividend) preferred stock having a par value of $100 can be sold for $92.An additional fee of $2 per share must be paid to the underwriters. Common stock: The firm's common stock is currently selling for $90 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.00 ten years ago to the $3.26 dividend payment, D0, that the company just recently made.…
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 30% long-term debt, 10% preferred stock, and 60% common stock equity (retained earnings, new common�� stock, or both). The firm's tax rate is 23%. Debt : The firm can sell for $1030 a 14-year, $1,000-par-value bond paying annual interest at a 8.00% coupon rate. A flotation cost of 2% of the par value is required. Preferred stock: 9.00% (annual dividend) preferred stock having a par value of $100 can be sold for $92.An additional fee of $2 per share must be paid to the underwriters. Common stock: The firm's common stock is currently selling for $90 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.00 ten years ago to the $3.26 dividend payment, D0, that the company just recently made.…
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 15% preferred stock, and 45% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 26%. Debt The firm can sell for $1005 a 13-year, $1,000-par-value bond paying annual interest at a 6.00% coupon rate. A flotation cost of 2.5% of the par value is required. Preferred stock 7.00% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $5 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $80 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.50 ten years ago to the $4.92 dividend payment, D0, that the company just recently made. If…
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 15% preferred stock, and 45% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 26%. Debt The firm can sell for $1005 a 13-year, $1,000-par-value bond paying annual interest at a 6.00% coupon rate. A flotation cost of 2.5% of the par value is required. Preferred stock 7.00% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $5 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $80 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.50 ten years ago to the $4.92 dividend payment, D0, that the company just recently made. If…
Sub : FinancePls answer very fast.I ll upvote CORRECT ANSWER . Thank You( Dnt use CHATGPT ) If a business unit generated $3,600,000 in BEFORE TAX PROFIT and had invested capital of $18,000,000 BUT had excellent terms with its suppliers so had CREDITORS of $2,000,000 and the Weighted Average Cost of Capital (WACC) for this business is 16%. Calculate the Economic Value Add (EVA) for this business unit and select which of the following is correct. (Assume a tax rate of 30%) Positive $40,000 - performance is acceptable because EVA is greater than zero and therefore adding value b. $2,520,000 Acceptable because EVAt is greater than zero c. Negative $40,000 unacceptable because EVA is less than zero d. $2,560,000 acceptable because EVA is greater than zero
Hello I need help with a queshtion in cooperate fiance and i need a calucaltion to this step by step please and an explination An all-equity firm expects its EBIT to be $330,000 every year, in perpetuity. Its cost of unleavened equity is 11.9%, its cost of debt is 5.4% and it faces a corporate tax rate of 22%. The firm plans to adjust its capital structure by issuing $500,000 in perpetual debt and using the proceeds to repurchase shares. Assume the EBIT is not affected by this recapitalization. What is the firm’s cost of levered equity after the recapitalization?
You are given the following information concerning a firm:Assets required for operation: $6,000,000Revenues: $8,100,000Operating expenses: $7,550,000Income tax rate: 40%. Management faces three possible combinations of financing: 100% equity financing 35% debt financing with a 6% interest rate 70% debt financing with a 6% interest rate What is the net income for each combination of debt and equity financing? Round your answers to the nearest dollar. 1 2 3 Net income $ $ $ What is the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. 1 2 3 Return on equity % % % If the interest rate had been 12 percent instead of 6 percent, what would be the return on equity for each combination of debt and equity financing? Round your answers to one decimal place. 1 2 3 Return on equity % % % What is the implication of the use of financial leverage…
please answer questions 1 and 2 all parts and show working and formulas where necessary. Thanks in advance. 1. Tesla has $50m in assets, which is financed with 40% debt and 60% equity. The company's beta is currently 1.25 and its tax rate is 30%. Using the Hamada equation, find Tesla's unlevered beta. 2 Firms HD and L.D each has $30m in invested capital, $8m of EBIT, a tax rate of 25%. Firm HD has a D/E ratio of 50% with an interest rate of 8% on their debt. Firm D has a debt-to capital ratio of 30%, however, pays 9% interest on their debt. Calculate the following:a. Retum on invested capital for each firmb. Return on equity for each firmc. If HD's CFO is thinking of lowering the D/E from 50% to 40%, which will lower their interest rate further from 8% to 7%, calculate the new ROE for HD.

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