Corning Inc. currently has a capital structure of 20 percent debt and 80 percent equity, but is considering a new product that will be produced and marketed by a separate division. The new division will have a capital structure of 58 percent debt and 42 percent equity. Corning has a current beta of 1.4, but is not sure what the beta for the new division will be. Ball Corporation is a firm that produces a product similar to the product under consideration by Corning. Ball has a beta of 1.6, a capita structure of 25 percent debt and 75 percent equity and a marginal tax rate of 40 percent. Corning's tax rate is 35 percent. What will be Corning's weighted average cost of capital for this new division if the after-tax cost of debt is 12 percent, the risk-free rate is 5 percent, and the market risk premium is 10 percent? 14.37% 17.25% 19.69% 10.56%

Corning Inc. currently has a capital structure of 20 percent debt and 80 percent equity, but is considering a new product that will be produced and marketed by a separate division. The new division will have a capital structure of 58 percent debt and 42 percent equity. Corning has a current beta of 1.4, but is not sure what the beta for the new division will be. Ball Corporation is a firm that produces a product similar to the product under consideration by Corning. Ball has a beta of 1.6, a capita structure of 25 percent debt and 75 percent equity and a marginal tax rate of 40 percent. Corning's tax rate is 35 percent. What will be Corning's weighted average cost of capital for this new division if the after-tax cost of debt is 12 percent, the risk-free rate is 5 percent, and the market risk premium is 10 percent? 14.37% 17.25% 19.69% 10.56%

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 25P

See similar textbooks

Similar questions

Herbo is a pharmaceutical company that is eyeing expansion. The entire decision on expansion is dependant on the accurate estimation of WACC. The project is planned to be financed by 80% Equity and 20% Debt. At this time Herbo had almost no debt. Inititial cost of expansion is 6.5 million which covers capex and working capital. Herbo's projected cash flows as well as some supporting numbers on comparable firms can be found below. Herbo's cost of equity is 12% Herbo's after tax cost of debt is 6.006% Herbo's WACC is 10.8012% How does capital structure affect WACC? Perform a sensitivity analysis for WACC based on Capital Structure.
Honda is considering an entry into the light jet manufacturing industry. This new project "HondaJet" being a little riskier than their current line of operations, Honda's global CEO has decided to add an additional 3.25 % to the company's overall cost of capital when evaluating this project. Honda is considering an equity offering of $420 million to fund this project and the capital structure for the "HondaJet" division will have 30 percent debt and 70 percent equity. Nomura Securities has agreed to manage this issue at an overall cost of 4.32% to Honda. The company's cost of equity and after-tax cost of debt are estimated at 14.23% and 7.78%. The cash flows are estimated as: 1st Yr: $40 mill; 2nd Yr: $70 mill; 3rd Yr thru 16th Yr: $82 mill. What is the projected NPV of the "HondaJet" project? O 1.$9 million approx. O 2.S96 million approx. O 3. $10 million approx O 4.-$9 million approx. O 5.$77 million approx..
Herbo is a pharmaceutical company that is eyeing expansion. The entire decision on expansion is dependant on the accurate estimation of WACC. Using the supporting numbers/information below find Herbos; WACC, Cost of Equity, Cost of debt. -The Initial cost of expansion is around 6.5 million. which would cover capex and working capital. Projected cash flows are below. Sales are expected to grow by 15% for the first five years and 10% for another five. Beyond the forecasted period there is an assumed perpetual growth rate of 5%. The project was planned to be financed by 80% equity and 20% debt. At this time Herbo had almost no debt - To find WACC you need to estimate the cost of debt and equity. To find WACC you will need Beta. As Herbo is an unlisted company you can estimate the beta based on comparable firms numbers found in the numbers below. How does Capital Structure affect WACC? Perform a sensitivity analysis for WACC based on capital structure. - The most viable source of debt…
Herbo is a pharmaceutical company that is eyeing expansion. The entire decision on expansion is dependant on the accurate estimation of WACC. Using the supporting numbers/information below find Herbos; WACC, Cost of Equity, Cost of debt. -The Initial cost of expansion is around 6.5 million. which would cover capex and working capital. Projected cash flows are below. Sales are expected to grow by 15% for the first five years and 10% for another five. Beyond the forecasted period there is an assumed perpetual growth rate of 5%. The project was planned to be financed by 80% equity and 20% debt. At this time Herbo had almost no debt - To find WACC you need to estimate the cost of debt and equity. To find WACC you will need Beta. As Herbo is an unlisted company you can estimate the beta based on comparable firms numbers found in the numbers below. - The most viable source of debt financing for Herbo was bank loans. The RBI has set the latest lending rate at 8.58 per cent. Herbo can also…
ABC Industries is considering an investment that requires the company to issue new equity. The project will cost $100M but will add $120M to the company’s value after it is completed. The company’s true value absent the new project is $1B. Management knows this true value, but outside investors mistakenly value the company at $600M absent the project. Investors are aware of the project and correctly forecast that it will add $120M to the company’s value. The company has no cash, and if it wants to invest in the project, it must issue equity. Now assume that the market will soon learn the true value of the company. However, the company cannot wait to invest in the project. If it does not invest now, then it will lose access to the project. What will the company’s stock price be once the market learns the company’s true value if the company issued equity and invested in the project? What will the company’s stock price be once the market learns the true value if the company passed up…
U.S. Robotics (USR) has a current (and target) capital structure of 70 percent common equity and 30 percent debt. The beta for USR is 1.2. USR is evaluating an investment in a totally new line of business. The new investment has an expected internal rate of return of 23 percent. USR wishes to evaluate this investment proposal. If the investment is made, USR intends to finance the project with the same capital structure as its current business. USR's marginal tax rate is 34 percent. USR has identified three firms that are primarily in the line of business into which USR proposes expanding. Their average beta is 1.5, and their average capital structure is 45 percent common equity and 55 percent debt. The marginal tax rate for these three firms averages 40 percent. The risk-free rate is 6 percent, and the expected market risk premium is 8.6 percent. Should USR undertake the project? Round your answer to one decimal place. The project should be accepted for any after- tax cost of debt of…
Western Wear is considering a project that requires an initial investment of $602,000. The firm maintains a debt-equity ratio of .55 and has a flotation cost of debt of 4.9 percent and a flotation cost of equity of 10.2 percent. The firm has sufficient internally generated equity to cover the equity portion of this project. What is the initial cost of the project including the flotation costs?
Limited Corporation is looking to replace a machine that is expected to increase productivity and, thereby, revenue. The cost of the machine is $100,000. Revenue is expected to increase by $20,000 in the first year, $50,000 in the second year, and $80,000 in the third year. After the third year, the company plans substitute the machine with a higher performance one. The alternative to this investment is to buy $100,000 in risky corporate bonds that currently yield 10% annually. Explain the feasibility of this project by computing the NPV.
Expando, Inc. is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $7 million. If demand for new products is low, the company expects to receive $11 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $14 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $12 million. Were demand to be low, the company would expect $13 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $17 million. In either case, the probability of demand being high is 0.50, and the probability of it being low is 0.50. Not constructing a new factory would result in no additional revenue being generated because…
Ramblin Wreck is a firm specializing in engineering components. The firm is publicly traded and is considering the following project: The project will last 5.00 years with an annual cash flow of $40.00 million. The project will require an initial investment of $140.00 million The firm must determine the cost of capital to evaluate the project. (The project is within the firm's normal activities) Ramblin Wreck, Inc. Financial Data: STOCK DATA: Current Price Per Share # of Shares Book Value $30.00 What is the WACC for the project? 2.00 million $50 million BOND DATA: Submit Current Price Per Bond # of bonds Annual Coupon Rate Face Value Per Bond Maturity $938.00 20,000.00 8.00% $1,000 The risk free rate in the economy is currently 2.00%, while investors have a market risk premium of 6.00%. Ramblin Wreck, Inc. has a beta of 1.48. The tax rate is 39.00%. 10 years Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4…
Herriman Solutions needs $14.4 million to build a new assembly line. The company's target debt-equity ratio is 1.08. The flotation cost for new equity is 10.2 percent, but the floatation cost for debt is only 5.7 percent. The company has sufficient resources to finance the equity portion of the assembly line internally. What is the true cost of building the new assembly line after taking flotation costs into account? Total initial cost = $ Allowed aftemots 3 Item Item Item Item Show
Companies often come across projects that have positive NPV opportunities in which the company does not invest. Companies must evaluate the value of the option to invest in a new project that would potentially contribute to the growth of the firm. These options are referred to as growth options. Markung's Co. is considering a three-year project that will require an initial investment of $30,000. It has estimated that the annual cash flows for the project under good conditions will be $60,000 and $11,000 under bad conditions. The firm believes that there is a 60% chance of good conditions and a 40% chance of bad conditions. If the firm is using a weighted average cost of capital of 13%, the expected net present value (NPV) of the project is round intermediate calculations and round your answer to the nearest dollar.) . Markung's Co. wants to take a potential growth option into account when calculating the project's expected NPV. If conditions are good, the firm will be able to invest…