Kohwe Corporation plans to finance a new investment with leverage. Kohwe Corporation plans to borrow $49.3 million to finance the new investment. The firm will pay interest only on this loan each year, and itwill maintain an outstanding balance of $49.3 million on the loan. After making the investment, Kohwe expects to earn free cash flows of $10.7 million each year. However, due to reduced sales and other financialdistress costs, Kohwe's expected free cash flows will decline to $9.7 million per year. Kohwe currently has 4.6 million shares outstanding, and it has no other assets or opportunities. Assume that the appropriatediscount rate for Kohwe's future free cash flows is 7.9% and Kohwe's corporate tax rate is 40%. What is Kohwe's share price today given the financial distress costs of leverage?The price per share is $23.01 per share. (Round to the nearest cent.)C

Outstanding balance on loan = $49,400,000Free cash flow= $10,700,000Expected Free cash flow=…

Answered: Kohwe Corporation plans to finance a…

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 Lesseig Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next 8 years. Machine A has an after-tax cost of $9.9 million but will provide after-tax inflows of $4.2 million per year for 4 years. If Machine A were replaced, its after-tax cost would be $11.8 million due to inflation and its after-tax cash inflows would increase to $4.5 million due to production efficiencies, Machine B has an after-tax cost of $13.1 million and will provide after-tax inflows of $3.6 million per year for 8 years. If the WACC is 7%, which machine should be acquired? Explain. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places. Machine -Select- is the better project and will increase the company's value by $ millions, rather than the s millions created by Machine -Select-.
MIG Tools can either lease or buy some equipment. The lease payments would be $12,800 a year and the purchase price is $35,900. The equipment has a 3-year life after which it is expected to have a resale value of $5,000. The firm uses 100 percent bonus depreciation, borrows money at 8 percent, and has a tax rate of 21 percent. What is the incremental cash flow for Year 1 if the company decides to lease the equipment rather than purchase it? Multiple Choice −$19,405 −$16,805 −$17,651 −$14,184 −$14,905
Grady-White Boats, Inc. is considering a project that will require additional inventory of $1,131,000. In addition, pursuing this project will also increase accounts payable by $400,000 as suppliers are willing to finance part of these purchases. Accounts receivable are currently $800,000 and are expected to increase by 10% if this project is accepted. The firm's cash requirements are not anticipated to change. What is the incremental change to net working capital as a result of accepting this project? O A. $1,531,000 O B. $1,451,000 C. $811,000 D. $651,000 O E. $1,611,000
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.You are negotiating to make a 7-year loan of $25,000 to Breck Inc. To repay you, Breck will pay $2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end of each year from Year 4 through Year 7. Breck is essentially riskless, so you are confident the payments will be made. You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan. What cash flow must the investment provide at the end of each of the final 4 years, that is, what is X?
Hardev
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A firm is considering taking a project that will produce $12 million of revenue per year. Cash expenses will be $5 million, and depreciation expenses will be $1 million per year. If the firm takes that project, then it will reduce the cash revenues of an existing project by $3 million. What is the free cash flow on the project, per year, if the firm uses a 40 percent marginal tax rate? O$2.8 million O $2.4 million 0 $4.6 million $3.4 million
Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $218,000, $224,000, and $231,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 11.5 percent, what is the maximum Southern Tours should pay today to acquire Holiday Vacations? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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