FrontLier Company is planning to acquire Stint Corp. The additionalpre-tax income from the acquisition will be $150,000 in the firstyear, but it will increase by 5% in future years. Because ofdiversification, the beta of FronLier will decrease from 1.20 to 0.9.Currently the return on the market is 11% and the riskless rate is6%. What is the maximum price that FrontLier should pay for StintCorp? The tax rate of FrontLier is 30%.O 1,870,0001,872,5001,875,000O 1,909,091

The maximum price should be equal to the present value of the total benefits from the acquisition of…

Answered: FrontLier Company is planning to…

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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Similar questions

Milton Industries expects free cash flows of $14 million each year. Milton's corporate tax rate is 21%, and its unlevered cost of capital is 14%. Milton also has outstanding debt of $25.57 million, and it expects to maintain this level of debt permanently. a. What is the value of Milton Industries without leverage? b. What is the value of Milton Industries with leverage? a. What is the value of Milton Industries without leverage? The value of Milton Industries without leverage is $ million. (Round to two decimal places.) b. What is the value of Milton Industries with leverage? The value of Milton Industries with leverage is $ million. (Round to two decimal places.)
Wilde Software Development has a 10% unlevered cost of equity. Wilde forecasts the following interest expenses, which are expected to grow at a constant 4% rate after Year 3. Wilde's tax rate is 25%. Interest expenses Year 1=$70 , Year 2= $85, Year 3= $125. What is the horizon value of the interest tax shield? PLEASE Do not round intermediate calculations And please round the answer to the nearest cent. Please show me the steps I don't know what I'm doing wrong!
Hallmark, the greeting card company, is considering going online. It is anticipated that it will cost the firm RM 1 billion to do so and that the firm will be able to use its current debt capacity to borrow 20% of this investment, at an after-tax cost of 4.5%. Hallmark has a beta of 1.1. Online retailers have a beta of 1.50 and do not carry debt. If the riskless rate is 6% and the market risk premium is 5.5% estimate the cost of capital for the online investment.
Ivy's Ice Cream is looking at an opportunity that would require an investment of $900,000 today. The investment will provide cash flows of $250,000 in the first year, $400,000 in the second year, and $600,000 in the third year. If the interest rate is 8%, what is the NPV of this investment opportunity? Should Ivy's Ice Cream move forward with this investment based on the NPV? (Round your answer to the nearest whole dollar.)
ABC mines copper with fixed costs of $0.50/lb and variable cost of $0.40/lb. The 1-year forward price of copper is $1/lb. The 1-year continuously compounded interest rate is 6%. If ABC does nothing to hedge copper price risk, what is its profit 1 year from now (per pound of copper)? If, on the other hand, ABC sells forward its expected copper production, what is its estimated 1-yearprofit from now? In both scenarios, assume the spot price of copper in 1 year can be $0.80, $0.90, $1.00, $1.10, and $1.20. 2) Compute ABC’s estimated profit in 1 year if it buys a put option with a strike of $1.00 and a premium of $0.04. Assume the spot price of copper in 1 year can be $0.80, $0.90, $1.00, $1.10, and $1.20.
You are considering adding a new product to one of your firm’s existing product lines which will generate an additional $200,000 in sales per year and will have a margin of 50% (same as the existing group margin). This will entail an increase in Net Working Capital of $10,000 and an investment in property, plant, and equipment of $50,000 per year. Assuming the company pays no tax and any depreciation in that year is negligible, the annual change in Unlevered Free Cash Flows resulting from the addition of the product is: a $40,000 b $50,000 c $90,000 d $100,000 e $10,000
Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $31.00 per share. The firm's dividend (D0) is $3.00 with constant annual growth rate of 5.0%. If the firm issues new stock, the flotation costs would equal 10.0 percent of the stock's market value. The firm's marginal tax rate is 40%. What is the firm's cost of external equity?
Rolex, Inc. has equity with a market value of $20 million and debt with a market value of $10 million. Assume the firm has no default risk and can borrow at the risk-free interest rate. The risk-free interest rate is 5 percent per year, and the expected return on the market portfolio is 11 percent. The beta of the company's equity is 1.2. The tax rate is 20%. What is the cost of capital for an otherwise identical all-equity firm?
Universal Exports Inc. is a small company and is considering a project that will require $650,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 25%. What will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes) of $155,000? 10.73% 17.88% 18.77% 12.52% Determine what the project’s ROE will be if its EBIT is –$50,000. When calculating the tax effects, assume that Universal Exports Inc. as a whole will have a large, positive income this year. -4.64% -6.67% -5.22% -5.8% Universal Exports Inc. is also considering financing the project with 50% equity and 50% debt. The interest rate on the company’s debt will be 12%. What will be the project’s ROE if it produces an EBIT of $155,000? 28.11% 18.74% 26.77% 21.42% What will be the project’s ROE if it produces an EBIT of –$50,000 and it…

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