Other relevant information about the company follows: The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent. Required: Answer the following questions given the information above  Calculate to the following for Pharmos considering its tax rate of 25%: i. After-tax cost of Bonds ii. Cost of Equity NO EXCEL SPREADSHEETS SHOW FULL WORKINGS WITHOUT EXCEL

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
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Other relevant information about the company follows:

The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.

Required: Answer the following questions given the information above

 Calculate to the following for Pharmos considering its tax rate of 25%:
i. After-tax cost of Bonds
ii. Cost of Equity

NO EXCEL SPREADSHEETS

SHOW FULL WORKINGS WITHOUT EXCEL

Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new
production line of portable electrocardiogram (ECG) machines for its clients who suffer from
cardiovascular diseases. The company must invest in equipment which cost $2,500,000 and falls
within a MARCS depreciation of 5-years and is expected to have a scrape value of $200,000 at|
the end of the project. Other than the equipment, the company needs to increase its cash and
cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts
receivable by $250,000 and increase account payable by $50,000 at the beginning of the
project. Pharmos Incorporated expect the project to have a life of five years. The company
would have to pay for transportation and installation of the equipment which has an invoice
price of $450,000o.
The company has already invested $75,000 in Research and Development and therefore
expects a positive impact on the demand for the new product line. Expected annual sales for
the ECG machines in the first three years are $1,200,000 and $850,000 in the following two
years. The variable costs of production are projected to be $267,000 per year in years one to
three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of
the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000
in profit, EACH YEAR in contribution after taxes, due to a decrease in sales of the other lines of
tester machines produced by the company. By investing in the new product line Pharmos
Incorporated would have to use a packaging machine which the company already has and will
be sold at the end of the project for $350,000 after-tax in the equipment market.
Transcribed Image Text:Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardiovascular diseases. The company must invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years and is expected to have a scrape value of $200,000 at| the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000o. The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project. The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 in profit, EACH YEAR in contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company will contract a new loan in the sum of $2,000,000 that is secured by
machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also
issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually, and
matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2
percent per issue.
The company's preferred stock pays an annual dividend of 4.5 percent and is currently
selling for $60, and there are 100,000 shares outstanding.
• There are 300,000 shares of common stock outstanding, and they are currently selling
for $21 each. The beta on these shares is 0.95.
Transcribed Image Text:The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually, and matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue. The company's preferred stock pays an annual dividend of 4.5 percent and is currently selling for $60, and there are 100,000 shares outstanding. • There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each. The beta on these shares is 0.95.
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