**Empire Electric Company (EEC)**Empire Electric Company (EEC) uses only debt and common equity in its financial structure. It can borrow unlimited amounts at an interest rate of **r = 9%** as long as it finances at its target capital structure, which consists of **25% debt and 75% common equity**. The company's last dividend ($D_0$) was **$1.60**, with an expected constant growth rate of **4%**, and its common stock sells for **$29**. EEC’s tax rate is **25%**.The company is evaluating two projects:- **Project A** has a rate of return of **14%**.- **Project B** offers a return of **8%**.Both projects are deemed equally risky and have risk levels similar to the firm’s existing assets.**Questions:**a. What is the cost of common equity? (Do not round intermediate calculations. Round your final answer to two decimal places.)b. What is the Weighted Average Cost of Capital (WACC)? (Do not round intermediate calculations. Round your final answer to two decimal places.)c. Which projects should Empire accept?**Answers Sections:**- **a. Cost of Common Equity:** [Input Box] %- **b. WACC:** [Input Box] %- **c. Project Selection:** [Dropdown Menu]There are no accompanying graphs or diagrams in this document.

cost of equity = dividend yield+ growth = 1.60*1.04/29 + 4% = 9.74% WACC = weight of equity *…

Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of ra- 9% as long as it finances at its target capital structure, which calls for 25% debt and 75% common equity. Its last dividend (Do) was $1.60, its expected constant growth rate is 4%, and its common stock sells for $29. EEC's tax rate is 25%. Two projects are available: Project A has a rate return of 14%, and Project B's return is 8%. These two projects are equally risky and about as risky as the firm's existing assets. a. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. b. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. c. Which projects should Empire accept? -Select- V

Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of ra- 9% as long as it finances at its target capital structure, which calls for 25% debt and 75% common equity. Its last dividend (Do) was $1.60, its expected constant growth rate is 4%, and its common stock sells for $29. EEC's tax rate is 25%. Two projects are available: Project A has a rate return of 14%, and Project B's return is 8%. These two projects are equally risky and about as risky as the firm's existing assets. a. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. b. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. c. Which projects should Empire accept? -Select- V

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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The capital structure weights of Kala Ghoda is .55 and the tax rate is 39 percent. The cash flows of Kala Ghoda will be $1.55 million per year for 7 years and the cost of debt is 5.46 percent. What is the NPV if it's equity costs 11.17 percent and the project's cost is $7.5 million?
Wizard Co. is considering a project that will require $500,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 30%. What will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $145,000? 20.3% 17.3% 14.2% 16.2% Determine what the project’s ROE will be if its EBIT is –$60,000. When calculating the tax effects, assume that Wizard Co. as a whole will have a large, positive income this year. -9.2% -8.4% -8.8% -7.6% Wizard Co. is also considering financing the project with 50% equity and 50% debt. The interest rate on the company’s debt will be 13%. What will be the project’s ROE if it produces an EBIT of $145,000? 25.2% 36.2% 29.9% 31.5% What will be the project’s ROE if it produces an EBIT of –$60,000 and it finances 50% of the project with equity and 50% with debt? When calculating the…
ABC Co needs to purchase equipment for $2 million. It is estimated that the after- tax cash inflows from the project will be $210,000 annually in perpetuity. ABC Co has a market value debt-to-assets ratio of 60%. The firm's cost of equity is 13%, its pre-tax cost of debt is 8%, and the flotation costs of debt and equity are 2% and 8%, respectively. The tax rate is 34%. Assume the project is of similar risk to the firm's existing operations. What is the dollar flotation cost for the proposed financing? $83,333 $88,000 $92,050 $79,840 $80,000
Godo
The Berndt Corporation expects to have sales of $12 million. Costs other than depreciation are expected to be 60% of sales, and depreciation is expected to be $2.4 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Brendt's federal-plus-state tax rate is 40%. Berndt has no debt. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. X Open spreadsheet
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A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27, 300 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 21% and can claim a 100% bonus depreciation immediately on the investment. Suppose the opportunity cost of capital is 10%. Ignore inflation. Calculate the project NPV for each company. What is the IRR of the after-tax cash flows for each company?
Consider a project to produce solar water heaters. It requires a $10 million investment and offers a level after-tax cash flow of $1.68 million per year for 10 years. The opportunity cost of capital is 11.15%, which reflects the project's business risk. a. Suppose the project is financed with $4 million of debt and $6 million of equity. The interest rate is 7.15% and the marginal tax rate is 21%. An equal amount of the debt will be repaid in each year of the project's life. Calculate APV. (Enter your answer in dollars, not millions of dollars. Do not round Intermediate calculations. Round your answer to the nearest whole number.) X Answer is complete but not entirely correct. Adjusted present value S 120,980 x b. If the firm Incurs issue costs of $610,000 to raise the $6 million of required equity, what will be the APV? (Enter your answer in dollars, not millions of dollars. Do not round Intermediate calculations. Round your answer to the nearest whole number. Negative amount shoud be…
You are evaluating a project that requires an investment of $97 today and garantees a single cash flow of $115 one year from now. You decide to use 100% debt financing, that is, you will borrow $97. The risk-free rate is 6% and the tax rate is 30%. Assume that the investment is fully depreciated at the end of the year, so without leverage you would owe taxes on the difference between the project cash flow and the investment, that is, $18. a. Calculate the NPV of this investment opportunity using the APV method. b. Using your answer to part (a), calculate the WACC of the project. c. Verify that you get the same answer using the WACC method to calculate NPV. d. Finally, show that flow-to-equity method also correctly gives the NPV of this investment opportunity.

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