Bloom Company Limited expects its EBIT to be $100,000 every year forever. The firm can borrow at 9 percent. The firm currently has no debt, and its cost of equity is 18 percent. The tax rate is 35 percent. The firm will borrow $80,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization?

Bloom Company Limited expects its EBIT to be $100,000 every year forever. The firm can borrow at 9 percent. The firm currently has no debt, and its cost of equity is 18 percent. The tax rate is 35 percent. The firm will borrow $80,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization?

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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Please answer the question as in attached file.
The firm is considering increasing its debt by $900,000, using the proceeds to buy back 90,000 shares of stock. what does buy back mean?
Organica Ltd. generates $350,000 cash flow each year. The cost of equity capital is 18% and the company has no debt outstanding. Organica would like to buy back $ 950,000 of its equity by borrowing the same amount at 12% per year. Assume that the debt will continue for an indefinite period and Modigliani and Miller proposition 1 holds, what is the cost of equity capital after the change in capital structure?
Al_Tech plc is considering investing in a new company, New_tech plc. It has estimated that the new tech company will cost £440,000. Cash flows from increased sales will be £160,000 in the first year. These cash flows will increase by 5% every year. Al_Tech plc estimates that New_tech plc will lose all its technological advantages in five years from now and will lose all its value. Assume that the initial cost is paid now, and all the revenues are received at the end of each year. The company requires a 12% p.a. return for such an investment. a) Calculate the NPV of the investment project. b) Calculate the profitability index and the discounted payback period. c) Should Al_Tech plc consider investing in New_tech plc? What can you say about the internal rate of return to that project? Explain. d) Explain why it is theoretically correct to assume that accepting a project with a positive NPV should increase the value of a company by the NPV of the project.
Suppose you have just become the president of J&J and the first decision you face is whether Co go ahead with a plan to renovate the company's Al systems. The plan will cost the company $60 million, and it is expected to save $15 million per year after taxes over the next five years. The firm sources of funds and corresponding required rates of return are as follow: $5 million common stock at 16%, $800,000 preferred stock at 12%, $6 million debt at 7%. All amounts are listed at market values and the firm's tax rate is 30%. You are the financial manager and supposed to calculate the NPV. What's the NPV? Do you recommend taking the project? ง = O NPV $5.167 Millions; I'll recommend the owners to take the project. O NPV=-$1.720 Millions; I'll tell the owners not to take the project. NPV = $4.562 Millions; I'll tell the owners not to take the project. O NPV=-$8.098 Millions; I'll tell the owners not to take the project.
Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if the economy is weak. Both events are equally likely. The market value today of Nielson's assets is $400 million. Suppose the risk-free interest rate is 3%. If Nielson borrows $157 million today at this rate and uses the proceeds to pay an immediate cash dividend, then according to MM, the expected return of Nielson's stock just after the dividend is paid would be closest to (%) (2 decimal places):
Your company has an opportunity to invest in four companies. You are trying todetermine which of these investments make sense. Your company has a 9% cost ofcapital. It will invest in these companies and receive an annual cash dividend eachyear starting one year after the investment. At the end of the term of investment, theinvestment will be scrapped with no salvage value. (a) Determine the internal rate ofreturn for each investment. Round off to the nearest integer discount rate, withdetailed calculation process. (b)Which investments would you recommend yourcompany make?
Google has 15 million shares outstanding with a current market price of $2 per share. Google announces an investment in a project where the initial investment in year 0 is $5 million and the cash inflow for the next five years will be $3 million, after which the investment will generate no cash flows. Google’s discount rate for this project is 8%. What is the dollar increase in Google’s share price due to the undertaking this investment?
Horizon Corporation has decided to a capital restructuring. This process of restructuring involves increasing its existing $80 million in debt to $125 million. However, the interest rate on the debt is 9 percent and it is not expected to change. The firm currently has 10 million shares outstanding, and the price per share is $60. If the restructuring is expected to increasethe return on equity (ROE), what is the minimum level for EBIT that Horizon’s management must be expecting? Ignore taxes in your answer.
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?
Marcus Inc., a manufacturing firm with no debt outstanding and a market value of $100 million is considering borrowing $ 40 million and buying back stock. Assuming that the interest rate on the debt is 9% and that the firm faces a tax rate of 21%, answer the following question: Estimate the present value of all future interest tax savings, assuming that the debt change is permanent. Group of answer choices a. 21m b. 8.4m c. 0.756m d. 1.89m

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