Project Discount Rate. Universal Foods has a debt-to-value ratio of 40%, its debt is currently selling on a yield of 6%, and its cost of equity is 12%. The corporate tax rate is 40%. The com- pany is now evaluating a new venture into home computer systems. The internal rate of return on this venture is estimated at 13.4%. WACCS of firms in the personal computer industry tend to average around 14%. (LO13-2) a. What is Universal's WACC? b. Will Universal make the correct decision if it discounts cash flows on the proposed venture at the firm's WACC? c. Should the new project be pursued?

Project Discount Rate. Universal Foods has a debt-to-value ratio of 40%, its debt is currently selling on a yield of 6%, and its cost of equity is 12%. The corporate tax rate is 40%. The com- pany is now evaluating a new venture into home computer systems. The internal rate of return on this venture is estimated at 13.4%. WACCS of firms in the personal computer industry tend to average around 14%. (LO13-2) a. What is Universal's WACC? b. Will Universal make the correct decision if it discounts cash flows on the proposed venture at the firm's WACC? c. Should the new project be pursued?

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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Suppose your company needs $17 million to build a new assembly line. Your target debt- equity ratio is .75. The flotation cost for new equity is 10 percent, but the flotation cost for debt is only 7 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small. a. What is your company's weighted average flotation cost, assuming all equity is raised externally? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the true cost of building the new assembly line after taking flotation costs into account? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,5667.) a. Flotation cost b. Amount raised %
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CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavoured liquor. Suppose the firm faces a tax rate of 35% and collects the information in the table below. If the company plans to finance 14% of the new liquor-focused division with debt and the rest with equity, what WACC should it use for its liquor division? Assume a cost of debt of 4.9%, a risk-free rate of 4.2%, an equity beta of 0.28, and a market risk premium of 5.9%. Beta 0.58 0.28 % Equity 95% 86% % Debt 5% 14% CoffeeStop Brown-Forman Liquors Note: Assume that the firm will always be able to utilize its full interest tax shield. CoffeStop should use a WAAC rate of % to evaluate the Brown-Forman Liquor division. (Round to two decimal places.)
An unlevered firm has a value of $900 million. An otherwise identical but levered firm has $180 million in debt at a 4% interest rate, which is its pre-tax cost of debt. Its unlevered cost of equity is 12%. No growth is expected. Assuming the federal-plus-state corporate tax rate is 25%, use the MM model with corporate taxes to determine the value of the levered firm. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to the nearest whole number. S million
Cut off at the bottom is "Expansion percentage change in EPS". Thank you.
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Corcovado Pharmaceuticals. Corcovado Pharmaceutical’s cost of debt is 7%. The risk-free rate of interest is 3%. The expected return on the market portfolio is 8%. After effective taxes, Corcovado’s effective tax rate is 25%. Its optimal capital structure is 60% debt and 40% equity. If Corcovado’s beta is estimated at 1.1, what is its weighted average cost of capital? If Corcovado’s beta is estimated at 0.8, significantly lower because of the continuing profit prospects in the global pharma sector, what is its weighted average cost of capital?
A firm is considering relaxing credit standards, which will result in annual sales increasing from P1.5 million to P1.75 million, the cost of annual sales increasing from P1,000,000 to P1,125,000, and the average collection period increasing from 40 to 55 days. The bad debt loss is expected to increase from 1 percent of sales to 1.5 percent of sales. The firm's required return on investments is 20 percent. The firm's cost of marginal investment in accounts receivable is? Format: 11,111.11

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