Over-the-Top Canopies (OTC) is evaluating two independent investments. Project 5 costs $150,000 and has an IRR equal to 13 percent, and Project L costs$140,000 and has an IRR equal to 11 percent. OTC's capital structure consists of 20 percent debt and 80 percent common equity, and its component costsof capital are far = 3%, rs = 11%, and re = 12.5%. If OTC expects to generate $220,000 in retained earnings this year, which project(s) should bepurchased? Round your answers to one decimal place.Acceptable?ProjectSLThus, -Select-WACC%%should be purchased,-Select--Select-

IRR or Internal Rate of Return is a financial metric which is used to assess/evaluate the…

Answered: Over-the-Top Canopies (OTC) is…

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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Guardian Inc. is trying to develop an asset-financing plan. The firm has $500,000 in temporary current assets and $400,000 in permanent current assets. Guardian also has $600,000 in fixed assets. Assume a tax rate of 30 percent. a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 80 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 12 percent on long-term funds and 6 percent on short-term financing. Compute the annual interest payments under each plan. Annual Interest Conservative Aggressive b. Given that Guardian's earnings before interest and taxes are $380,000, calculate earnings after taxes for each of your alternatives. Earning After Taxes Conservative Aggressive
Walsh Company is considering three independent projects, each of which requires a $3 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here: Project H (high risk): Cost of capital Project M (medium risk): Project L (low risk): Cost of capital Cost of capital = 15% = 11% = 8% IRR = 19% IRR = 12% IRR = 7% Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 50% debt and 50% common equity, and it expects to have net income of $4,443,000. If Walsh establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places. %
Net present values for three alternative Investment projects follow. (a) If the company accepts all positive net present value Investments, which of these projects will it accept? (b) If the company can choose only one project, which will it choose? Potential Projects Net present value Project A $1,400 Project B $(12,100) Project C $15,000 (a) If the company accepts all positive net present value investments, which of these projects will it accept? (b) If the company can choose only one project, which will it choose?
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.
Weston Systems is considering the following independent projects for the coming year: Project Required Investment Expected Rate of Return Risk X $8 million 12.5% High Y 8 million 9.5% Average Z 3 million 5.5% Low Weston’s WACC is 9 percent, but it adjusts for risk by adding 2 percent to the WACC for high-risk projects and subtracting 2 percent for low-risk projects. What would be the minimum acceptable return for each of the three projects? Which project(s) should Weston accept assuming it faces no capital constraints?
Lakelord Company is considering two mutually exclusive projects, A and B. Project A costs $89977 and is expected to generate $64801 in year one and $66409 in year two. Project B costs $110404 and is expected to generate $58366 in year one, $62248 in year two, $68386 in year three, and $49405 in year four. The firm's required rate of return for these projects is 0.071. The net present value for Project A is Instruction: Type ONLY your numerical answer in the unit of dollars, NO $ sign, NO comma, and round to the nearest whole number. E.g., if your answer is $7,001.56, should type ONLY the number 7002, NEITHER 7,001.6, $7001.6, $7,001.6, NOR 7001.56. Otherwise, Blackboard will treat it as a wrong answer.
Over-the-Top Canopies (OTC) is evaluating two independent investments. Project S costs $155,000 and has an IRR equal to 9 percent, and Project L costs $145,000 and has an IRR equal to 8 percent. OTC's capital structure consists of 20 percent debt and 80 percent common equity, and its component costs of capital are rdT = 4%, rs = 10%, and re = 13.5%. If OTC expects to generate $230,000 in retained earnings this year, which project(s) should be purchased? Round your answers to one decimal place. Project S -> WACC ______ % -> Acceptable? Yes / No Project L -> WACC ______ % -> Acceptable? Yes / No Thus, (ONLY PROJECT S, ONLY PROJECT L, BOTH PROJECTS, NEITHER PROJECT) should be purchased.
For your ongoing business, the required investments are $420,000 for X1, $550,000 for X2, $720,000 for X3, and $800,000 for X4. X0 denotes the do-nothing alternative. Moreover, you had information about the internal rates of return for the incremental projects: IRR for X1-XO is 18%, IRR for X2-XO is 20%, IRR for X3-XO is 25%, IRR for X4-XO is 30%, IRR for X2-X1 is 10%, IRR for X3-X1 is 21%, IRR for X4-X1 is 19%, IRR for X3- X2 is 18%, IRR for X4-X3 is 14%, IRR for X4-X2 is 23%. Using the information above, if the MARR is 15%, what system should be selected? а) ХО O b) X2 с) XЗ d) None of the answers are correct e) X1 O f) X4
Wags Dog Emporium is considering a project that requires an initial investment of $280,000. Wags maintains a debt-equity ratio of 0.55, has a flotation cost of debt of 7.5 percent and a flotation cost of equity of 10.5 percent. The firm has sufficient internally generated equity to cover the equity portion of this project and will not issue additional equity. What is the initial cost of the project including the flotation costs? Group of answer choices $263,983 $272,552 $279,592 $287,652 $311,762
Walsh Company is considering three independent projects, each of which requires a $5 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here: Project H (high risk): Project M (medium risk): Cost of capital = 15% Cost of capital = 13% Project L (low risk): Cost of capital = 7% IRR = 8% Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 35% debt and 65% common equity, and it expects to have net income of $11,329,500. If Walsh establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places. % IRR = 22% IRR = 12%
Bidump Corporation is evaluating two mutually exclusive capital budgeting projects. Project W2, which costs $210,000, is expected to generate $51,400 for six years and Project 5, which costs $104,000, it expected to $45,200 for six years. Bidump's required rate of return is 11 percent. What is the internal rate of return (IRR) of the project the company should purchase) Do not round intermediate calculations. Round your answer to two de places. -Select- should be purchased. Its IRR is N
Axis Corp. is studying two mutually exclusive projects. Project Kelvin involves an overhaul of the existing system; it will cost $40,000 and generate cash inflows of $20,000 per year for the next 3 years. Project Thompson replaces the existing system; it will cost $285,000 and generate cash inflows of $65,000 per year for 6 years. Using a(n) 9.07% cost of capital, calculate each project's NPV, and make a recommendation based on your findings. The NPV of project Kevin is ____ The NPV of project Thompson is _____ Which project should the company choose?

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