Consider the following case of Happy Turtle Transportation Company: Suppose Happy Turtle Transportation Company is considering a project that will require $400,000 in assets. The company is small, so it is exempt from the interest deduction limitation under the new tax law. • The project is expected to produce earnings before interest and taxes (EBIT) of $40,000. Common equity outstanding will be 20,000 shares. • The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Happy Turtle Transportation Company's return on equity (ROE) on the project will be In addition, Happy Turtle's earnings per share (EPS) will be Alternatively, Happy Turtle Transportation Company's CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company's debt will be 12%. Because the company will finance only 50% of the project with equity, it will have only 10,000 shares outstanding. Happy Turtle Transportation Company's ROE and the company's EPS will be if management decides to finance the project with 50% debt and 50% equity. Typically, using financial leverage will a project's expected ROE.

Consider the following case of Happy Turtle Transportation Company: Suppose Happy Turtle Transportation Company is considering a project that will require $400,000 in assets. The company is small, so it is exempt from the interest deduction limitation under the new tax law. • The project is expected to produce earnings before interest and taxes (EBIT) of $40,000. Common equity outstanding will be 20,000 shares. • The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Happy Turtle Transportation Company's return on equity (ROE) on the project will be In addition, Happy Turtle's earnings per share (EPS) will be Alternatively, Happy Turtle Transportation Company's CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company's debt will be 12%. Because the company will finance only 50% of the project with equity, it will have only 10,000 shares outstanding. Happy Turtle Transportation Company's ROE and the company's EPS will be if management decides to finance the project with 50% debt and 50% equity. Typically, using financial leverage will a project's expected ROE.

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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Your firm is considering investing in a new capital project that requires an initial investment of $8,000,000. This equipment will be depreciated by the straight-line over four years down to a value of zero. The machinery also has an operation life of four years. At the end of that life, you estimate it will have a salvage value of $120,000. Any gain or loss on the resell will be taxed at the firm's marginal tax rate. During the four-year life, the project should generate annual cash flows of $225,000 per year. The firm has a marginal tax rate of 22%, and it requires a return of 8.50% on projects of such risk. What is the Net Present Value of this project?
A large profitable corporation is considering a capital investment of $50,000. The equipment has a projected salvage value of $0 at the end of the two-year project period. The annual gross income each of the next two years is projected to be $44,000 and expenses are projected to be $14,000 annually. The depreciation amount will be $25,000 annually. This profitable corporation has an incremental income tax rate of 25% and the MARR is 10%. The projections are based on current economic conditions without consideration of price or cost escalations. Nevertheless, a general inflation rate of 4% is expected, and it is anticipated that all future costs and revenues will react to this inflation. Determine the after-tax CF (in actual dollars) for Year 1 (only).
A corporation is considering purchasing a machine that will save $150,000 per year before taxes. The cost of operating the machine (including maintenance) is $30,000 per year. The machine will be needed for five years, after which it will have a zero salvage value. MACRS depreciation will be used, assuming a three-year class life. The marginal income tax rate is 25%. If the firm wants 15% return on investment after taxes, how much can it afford to pay for this machine? Click the icon to view the MACRS depreciation schedules Click the icon to view the interest factors for discrete compounding when /- 15% per year. If the firm wants 15% return on investment after taxes, it can afford to pay thousand for this machine. (Round to one decimal place.)
Your company is considering a new project that will require $1 million of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $150,000 using straight-line depreciation. The cost of capital is 13 percent, and the firm’s tax rate is 34 percent.Estimate the present value of the tax benefits from depreciation. (Round your answer to 2 decimal places.)
Your company is considering a new project that will require $2,000,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $250,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm's tax rate is 21 percent. Estimate the present value of the tax benefits from depreciation. Multiple Choice $68,250 $988,789 $175,000 $207,646
As a member of UA Corporation's financial staff, you must estimate the Year 1 cash flow for a proposed project with the following data. Under the new tax law, the equipment used in the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. What is the Year 1 cash flow? Do not round the intermediate calculations and round the final answer to the nearest whole number. Sales revenues, each year $45,500 Other operating costs $22,522 Interest expense $4,000 Tax rate 25.0%
Mid-America Shipping is considering purchasing a new barge for use on its Ohio River routes. The new barge will cost S13.2 million and is expected to generate an income of $7.5 million the first year (growing $1M each year), with additional expenses of $2.6 million the first year (growing $400,000 per year). If Mid-America uses MACRS, is in the 26% tax bracket, and has a MARR of 12%, what is the present worth of the first 4 years of after-tax cash flows from this barge? Would you recommend that Mid-America purchase this barge? Does your answer change at 5 or 6 or 7 or ...years?
Baghiben
Novak Company would like to start a new venture. The company is currently in the 24% marginal tax bracket and uses a 4% discount factor. The company projects that the venture will produce before-tax cash flows of $9,000 in Year 0, $20,000 in Year 1, and $33,000 in Year 2. (a) If taxable income and the before-tax cash flows are equal in the year received, compute the present value of the cash flows. (Round present value factor calculations to 3 decimal places, e.g. 1.251 and final answer to O decimal places, e.g. 58,971.) Present value
The Wet Corporation has an investment project that will reduce expenses by $30,000 per year for 3 years. The project's cost is $30,000. If the asset is part of the 3 year MACRS category (33.33% first year depreciation) and the company's combined tax rate is 29%, what is the cash flow from the project in year 1? Note: Do not round intermediate calculations. Round your answer to the nearest dollar amount. Multiple Choice $23,650 $24.980 $24.200 $25,660
Plant company is contemplating the purchase of a new piece of equipment for $59,000. Plant is in the 20% income tax bracket.
Baghiben

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