Suppose that Rose Industries is considering the acquisition of anotherfirm in its industry for $137 million. The acquisition is expected toincrease Rose's free cash flow by $5 million the first year, and thiscontribution is expected to grow at a rate of 4% every yearthereafter. Rose currently maintains a debt to equity ratio of 1, itscorporate tax rate is 21%, its cost of debt rD is 6%, and its cost ofequity rE is 10%. Rose Industries will maintain a constant debt-equityratio for the acquisition.The Free Cash Flow to Equity (FCFE) for the acquisition in year O isclosest to ($ Million) (2 decimal places):

To determine Rose Industries' unlevered cost of capital, we need to calculate the weighted average…

Answered: Suppose that Rose Industries 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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Spentworth Industries Corp. is considering an acquisition of Keedsler Motors Co., and estimates that acquiring Keedsler will result in incremental after-tax net cash flows in years 1–3 of $9 million, $13.5 million, and $16.2 million, respectively. After the first three years, the incremental cash flows contributed by the Keedsler acquisition are expected to grow at a constant rate of 3% per year. Spentworth’s current beta is 1.60, but its post-merger beta is expected to be 2.08. The risk-free rate is 4.5%, and the market risk premium is 6.60%. Based on this information, complete the following table by selecting the appropriate values. (Note: Round your intermediate calculations to two decimal places.) Value Post-merger cost of equity Projected value of the cash flows at the end of three years The value of Keedsler Motors Co.’s contribution to Spentworth Industries Corp.
Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of 51.54 million per year, growing at a rate of 2.4% per year. Goodyear has an equity cost of capital of 8,7%, a debt cost of capital of 6.7%, a marginal corporate tax rate of 38%, and a debt- equity ratio of 2.6. If the plant has average risk and Goodyear plans to maintain a constant debt equity ratio, what after tax amount must it receive for the plant for the divestiture to be profitable?
Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixed assets total $2 million, and the firm plans to maintain a 60% debt-to-assets ratio. Rentz's interest rate is currently 8% on both short-term and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 10% of total sales, and the federal-plus-state tax rate is 40%. a. What is the expected return on equity under each current assets level? Round your answers to two decimal places. Restricted policy Moderate policy…
Wham Corp. is financed entirely by equity at the cost of 12%. The firm is expected to generate a level, perpetual stream of earnings of $1,000 per year. It operates in a perfect market except for taxation at the rate of 40%. (a) Compute the net cash flow per year and the value of the unlevered firm. (b) Now assume the firm borrows $3,000 at a debt cost of 8%. (c) Compute the value of the levered firm and account for the difference in your answer for the unlevered firm.
The Wei Corporation expects next year's net income to be $10 million. The firm is currently financed with 35% debt. Wei has $12 million of profitable investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual distribution model (assuming all payments are in the form of dividends), how large should Wei's dividend payout ratio be next year? Round your answer to two decimal places .
Milton Industries expects free cash flows of $14 million each year. Milton's corporate tax rate is 21%, and its unlevered cost of capital is 14%. Milton also has outstanding debt of $25.57 million, and it expects to maintain this level of debt permanently. a. What is the value of Milton Industries without leverage? b. What is the value of Milton Industries with leverage? a. What is the value of Milton Industries without leverage? The value of Milton Industries without leverage is $ million. (Round to two decimal places.) b. What is the value of Milton Industries with leverage? The value of Milton Industries with leverage is $ million. (Round to two decimal places.)
Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.49 million per year, growing at a rate of 2.3% per year. Goodyear has an equity cost of capital of 8.6%, a debt cost of capital of 6.7%, a marginal corporate tax rate of 34%, and a debt-equity ratio of 2.4. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable? A divestiture would be profitable if Goodyear received more than $ million after tax. (Round to one decimal place.)
Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $183,000 per year. The cost of equity is 13.1 percent and the tax rate is 21 percent. The firm can borrow perpetual debt at 6.3 percent. Currently, the firm is considering converting to a debt–equity ratio of .93. What is the firm's levered value? MM assumptions hold. A. $829,786 B. $1,215,262 C. $1,155,579 D. $997,511 E. $921,985
Dyrdek Enterprises has equity with a market value of $12.6 million and the market value of debt is $4.45 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.9 percent. The new project will cost $2.56 million today and provide annual cash flows of $666,000 for the next 6 years. The company's cost of equity is 11.79 percent and the pretax cost of debt is 5.06 percent. The tax rate is 24 percent. What is the project's NPV? Multiple Choice $208,195 $194,561 $536,049 $183,363 $364,858
Derry Corporation is expected to have an EBIT of $21 million next year. Increases in depreciation, the increase in net working capital, and capital spending are expected to be $165,000, $80,000, and $120,000, respectively. All are expected to grow at 18 percent per year for four years. The company currently has $10.4 million in debt and 750,000 shares outstanding. You believe that in Year 5 sales will be $23.7 million and the appropriate price-sales ratio is 2.9. The company's WACC is 8.5 percent and the tax rate is 21 percent. What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Share price
Consider a REIT that holds high quality office buildings in some of the best locations in the US. The REIT is currently traded at a price of $64/share and there are 130 million shares outstanding. Using the information below answer the following questions: Expected next year total revenue: $750M Expected next year total expenses (including interest and depreciation): $380M Expected next year depreciation: $90M Expected next year interest: $70M Total debt: $1.6B Current office CAP in the US: 4.5% to 6.0% depending on quality and location. a. What is your estimation for a fair market value for a share of the REIT described? Show your work! b. What is your estimation for a fair price to pay for a share of the REIT described, if you require a 7.5% rate of return on an unlevered basis and expect the REIT to increase NOI at an average rate of 2.5%? Should you buy shares of that REIT?
Pack-and-Send, Inc. expects to have free cash flow of $6.5 million next year and this cash flow will grow at a rate of 6% per year thereafter. The firm's equity cost of capital is 9% and its debt cost of capital is 5%. Assume that Pack-and-Send has a corporate tax rate of 30%. If the firm maintains a debt-to-equity ratio of 0.60, the value of the firm's tax shield is closest to: options: $18.47 million $27.95 million $54.28 million $260.00 million None of the above

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