Mary, Inc. is considering a project for next year, which will cost $5 million. Mary plans to use the following combination of debt andequity to finance the investment. Issue $1.5 million of 10-year bonds at a price of 101, with a coupon/contract rate of 4%, andflotation costs of 2% of par. Use $3.5 million of funds generated from retained earnings.The equity market is expected to earn 8%. U.S. Treasury bonds are currently yielding 3%. The beta coefficient for Mary, Inc. isestimated to be .70. Mary is subject to an effective corporate income tax rate of 30 percent.Compute Mary's expected rate of return using the Capital Asset Pricing Model (CAPM). Please show calculations.

Expected rate of return is the cost of capital of the company and is the weighted cost of equity and…

Answered: Mary, Inc. is considering a project for…

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 business plans to invest a further $15 million in machinery and equipment and is considering two possible financing options. The first option is to make a one-for-four rights issue. The current market price per share is $2.00 and the rights shares would be issued at a discount of 25% on this market price. The second option is to take a further loan that will have an initial annual rate of interest of 10%. This is a variable rate and, while interest rates have been stable for a number of years, there has been recent speculation that interest rates will begin to rise in the near future. The outcome of the expansion is not certain. The management team involved in developing and implementing the expansion plans has provided three possible outcomes concerning earnings before interest and taxes for the following year: Change in earnings before interest and taxes from previous year Optimistic 30% Most likely 10% Pessimistic 20% The dividend per share for the forthcoming year is expected…
Kohwe Corporation plans to issue equity to raise $50.7 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10.4 million each year. Kohwe's only asset is this investment opportunity. Suppose the appropriate discount rate for Kohwe's future free cash flows is 7.7%, and the only capital market imperfections are corporate taxes and financial distress costs. a. What is the NPV of Kohwe's investment? b. What is the value of Kohwe if it finances the investment with equity? a. What is the NPV of Kohwe's investment? The NPV of Kohwe's investment is $ million. (Round to two decimal places.) b. What is the value of Kohwe if it finances the investment with equity? The Kohwe finances stment with equity $ million. (Round decimal places.)
Daniel Electric is planning to open a distribution center. The center will cost $500,000.00. The company can finance 96% of the project with 8.2%, $10,000.00 bonds. The remaining capital will come from internal sources. Complete the form to evaluate the effect of financial leverage on the proposed center. Evaluate the earnings potential of the project assuming that operating income will increase by 7.6%, 7.8%, or 8.0% of the center cost.
GoodFish Corporation is considering a new project with a four-year useful life. The initial investment on this project is $1,200,000 immediately. The future cash flows associated with this project are $650,000, $650,000, $650,000, and $856,000 in years 1, 2, 3 and 4, respectively. GoodFish has a target debt–equity ratio of 3, a cost of equity of 10 percent, and a pretax cost of debt of 8 percent. The tax rate is 25%. What is the NPV of this project? A. $1,158,843.73 B. $1,077,782.13 C. $905,193.80 D. $1,051,753.51
Wool Express (WE) has a capital structure of 30% debt and 70% equity. WE is considering a project that requires an investment of$2.6 million. To finance this project, WE plans to issue 10-year bonds with a coupon interest rate of 12%. Each of these bonds has a $1,000 face value and will be sold to net WE $980. If the current risk-free rate is 7% and the expected market return is 14.5%, what is the weighted cost of capital for WE? Assume WE has a beta of 1.20 and a marginal tax rate of 40%. Group of answer choices 13.4% 14.9% 12.4% 16.0%
Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, assets (which is equal to its total invested capital) to be $200,000, and its tax rate to be 25%. Under Plan A it would finance the firm using 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a contract with existing bondholders the TIE ratio would have to be maintained at or above 3.6. Under Plan B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, total invested capital, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure? Do not round your intermediate calculations. a. 7.92% O b. 7.36 %1 O c. 8.00% O d. 7.84% O e. 7.76%
WACC and NPV Pink, Inc., is considering a project that will result in initial aftertax cash savings of $1.82 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt-equity ratio of .85, a cost of equity of 12.2 percent, and an aftertax cost of debt of 5 percent. The cost-saving proposal is somewhat riskier than the usual projects the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project?
6. Lucron Corp. is considering a project that will cost $310,000 and will generate after-tax cash flows of $96,000 per year for 5 years. The firm's WACC is 12% and its target D/E ratio is 2/3. The flotation cost for debt is 4% and the flotation cost for equity is 8%. What would be the new cost of the project after adjusting for flotation costs? A) $328,390 B$329,787 $331,197 D) $329,840 E) $290,160 7. When calculating weights for the WACC, it has become relatively common to use Net Debt. How is Net Debt calculated? A) Net Debt = Total amount of debt - Cash & Risk-Free Securities B) Net Debt = Total amount of debt + Cash & Risk-Free Securities C) Net Debt = Long-term Debt - Short-term Debt D) Net Debt Short-term Debt-Long-term Debt E) Net Debt- Long-term Debt-Short-term Debt + Cash & Risk-Free Securities Please use the following information to answer the next THREE questions. LNZ Corp. is thinking about leasing equipment to make tinted lenses. This equipment would cost $3,400,000 if…
Ariana, Incorporated, is considering a project that will result in initial aftertax cash savings of $5.7 million at the end of the first year, and these savings will grow at a rate of 3 percent per year, indefinitely. The firm has a target debt-equity ratio of .56, a cost of equity of 13.1 percent, and an aftertax cost of debt of 5 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. Calculate the required return for the project. Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. What is the maximum cost the company would be willing to pay for this project? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

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