Problem 18-7 NPV for an All-Equity CompanyJiminez, Incorporated, is an all-equity firm. The cost of the company's equity is currently11.5 percent and the risk-free rate is 4.4 percent. The company is currently considering aproject that will cost $11.94 million and last six years. The company uses straight-linedepreciation. The project will generate revenues minus expenses each year in theamount of $3.55 million. If the company has a tax rate of 23 percent, what is the netpresent value of the project? (Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,1,234,567.89)Net present$ 6,886,082.02value

The answer is in the explanation.Explanation:1. Annual Revenue = $3.55 million 2. Depreciation: The…

Answered: Problem 18-7 NPV for an All-Equity…

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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Q No. 1 Assume that you are given assignment to evaluate the capital budgeting projects of the company which is considering investing in two coal projects, “Thar Coal Project” and “Sahiwal Coal Project”. The initial cost of each project is Rs. 10000 Million. Company discounts all projects based on WACC. Further, all the projects are equally risky projects, and the company uses only debt and common equity for financing these projects. It can borrow unlimited amounts at after tax interest rate of rd 5% as long as it finances at its target capital structure, which calls for 50% debt and 50% common equity. The dividend for next period is Rs 4.0, its expected that they will grow at the constant growth rate of 8%, and the company’s common stock sells for 40. The tax rate is 50%. The cash flows of both the projects are given in table below: Time Thar Coal Project Cashflows (amount in Rs. Millions) Sahiwal Coal Project Cashflows (amount in Rs. Millions)0 - 10,000 - 10,0001 6,500 3,5002 3,000…
k algo 10-31 Cash Flows And NPV The Bruin's Den Outdoor Gear is considering a new 6-year project to produce a new tent line. The equipment necessary would cost $1.29 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 15 percent of its initial cost. The company believes that it can sell 23,500 tents per year at a price of $64 and variable costs of $25 per tent. The fixed costs will be $395,000 per year. The project will require an initial investment in net working capital of $193,000 that will be recovered at the end of the project. The required rate of return is 10.7 percent and the tax rate is 21 percent. What is the NPV?
Problem 9-11 he following is a four-year forecast for Torino Marine. Year Free cash flow ($ millions) 2022 -59 a. Fair market value b. Fair market value per share 2023 80 2024 97 . Estimate the fair market value of Torino Marine at the end of 2021. Assume that after 2025, earnings before interest and tax will remain constant at $200 million, depreciation will equal capital expenditures in each year, and working capital will not change. Torino Marine's weighted-average cost of capital is 12 percent and its tax rate is 40 percent. Note: Do not round Intermediate calculations. Enter your answer in millions rounded to 1 decimal place. million 2025 119 . Estimate the fair market value per share of Torino Marine's equity at the end of 2021 if the company has 44 million shares outstanding and the market value of its interest-bearing liabilities on the valuation date equals $340 million. Note: Do not round Intermediate calculations. Round your answer to 2 decimal places.
Problem 6-4 Calculating Project Cash Flow from Assets Esfandairi Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.29 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life. The project is estimated to generate $1,790,000 in annual sales, with costs of $700,000. The project requires an initial investment in net working capital of $410,000, and the fixed asset will have a market value of $420,000 at the end of the project. a. If the tax rate is 21 percent, what is the project's Year O net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567. A negative answer should be indicated by a minus sign.) b. If the required return is 12 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places,…
Problem 13-22 Flotation Costs and NPV Landman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of 75. It's considering building a new $57 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $6.9 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock. The flotation costs of the new common stock would be 8.7 percent of the amount raised. The required return on the company's new equity is 15 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 3.7 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 5.8 percent, they will sell at par. 3. Increased use of accounts payable financing. Because this financing is part of the company's ongoing daily business, it has no flotation costs and the company assigns it a cost that is the…
QS 11-17 (Algo) Net present value of annuity and salvage value LO P3 Pablo Company is considering buying a machine that will yield income of $3,100 and net cash flow of $14,700 per year for three years. The machine costs $45,900 and has an estimated $11,100 salvage value. Pablo requires a 10% return on its investments. Compute the net present value of this investment. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your present value factor to 4 decimals.) Years 1-3 Year 3 salvage Totals [Initial investment Net present value Net Cash Flows X PV Factor 14,700 x 11,100 x $ S = = Present Value of Net Cash Flows $ 0 0
Problem 18-12 Eagle Products EBITDA is $500, its tax rate is 21%, depreciation is $30, capital expenditures are $80, and the planned increase in net working capital is $10. What is the free cash flow to the firm? (Round your answer to 2 decimal place.) Answer is complete but not entirely correct. $335.00 FCFF
Problem 14-30 Flotation Costs and NPV (LO4, 7) Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt-equity ratio of 0.76. It’s considering building a new $38 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $8.0 million in perpetuity. The company raises all equity from outside financing. There are three financing options: A new issue of common stock: The flotation costs of the new common stock would be 10% of the amount raised. The required return on the company’s new equity is 14%. A new issue of 20-year bonds: The flotation costs of the new bonds would be 4% of the proceeds. If the company issues these new bonds at an annual coupon rate of 8.0%, they will sell at par. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC.…
Problem 9-33 Working Capital (LO4) Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.3 million. The equipment will be depreciated straight-line over 6 years, but, in fact, it can be sold after 6 years for $519,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year's forecast sales. The firm estimates production costs equal to $1.20 per trap and believes that the traps can be sold for $5 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 40%, and the required rate of return on the project is 10%. Year: Sales (millions of traps) 0 1 2 0 0.5 0.6 3 0.7 4 5 0.7 0.5 6 0.2 Thereafter 0 Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV? Note: Do not…
Q No. 1 Assume that you are given assignment to evaluate the capital budgeting projects of the company which is considering investing in two coal projects, “Thar Coal Project” and “Sahiwal Coal Project”. The initial cost of each project is Rs. 10000 Million. Company discounts all projects based on WACC. Further, all the projects are equally risky projects, and the company uses only debt and common equity for financing these projects. It can borrow unlimited amounts at after tax interest rate of rd 5% as long as it finances at its target capital structure, which calls for 50% debt and 50% common equity. The dividend for next period is Rs 4.0, its expected that they will grow at the constant growth rate of 8%, and the company’s common stock sells for 40. The tax rate is 50%. The cash flows of both the projects are given in table below: Time Thar Coal Project Cashflows (amount in Rs. Millions) Sahiwal Coal Project Cashflows (amount in Rs. Millions)0 - 10,000 - 10,0001 6,500 3,5002 3,000…
Exercise 10-10A (Algo) Using the internal rate of return to compare investment opportunities LO 10-3 Velma and Keota (V&K) is a partnership that owns a small company. It is considering two alternative investment opportunitles. The first Investment opportunity will have a five-year useful life, will cost $9,869.02, and will generate expected cash inflows of $3,300 per year. The second investment is expected to have a useful life of three years, will cost $8,703.98, and will generate expected cash inflows of $3.500 per year. Assume that V&K has the funds available to accept only one of the opportunities. (PV.of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required o. Calculate the internal rate of return of each investment opportunity. (Do not round intermediate calculations.) b. Based on the internal rates of return, which opportunity should V&K select? Internal Rate of Return a First investment Second investmont bV&K should select the
Exercise 16-34 Profitability Index; Taxes (Section 2) (LO 16-7) The owner of Atlantic City Confectionary is considering the purchase of a new semiautomatic candy machine. The machine will cost $23,000 and last 9 years. The machine is expected to have no salvage value at the end of its useful life. The owner projects that the new candy machine will generate $3,500 in after-tax savings each year during its life (including the depreciation tax shield). Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Required: Compute the profitability index on the proposed candy machine, assuming an after-tax hurdle rate of (a) 8 percent, (b) 1O percent, and (c) 12 percent. (Round your final answers to 2 decimal places.) Profitability Index (a) 8 percent (b) 10 percent (c) 12 percent

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