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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Scabiosa Company Limited expects its EBIT to be $100,000 every year forever. The firm can borrow at 9 percent. The firm currently has no debt, and its cost of equity is 18 percent. The tax rate is 35 percent. The firm will borrow $80,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization?
An unlevered firm has a value of $850 million. An otherwise identical but levered firm has $80 million in debt at a 3% interest rate, which is its pre-tax cost of debt. Its unlevered cost of equity is 10%. After Year 1, free cash flows and tax savings are expected to grow at a constant rate of 4%. Assuming the corporate tax rate is 25%, use the compressed adjusted present value model to determine the value of the levered firm. (Hint: The interest expense at Year 1 is based on the current level of debt.) Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to two decimal places.
Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $162,000 per year. The cost of equity is 117 percent and the tax rate is 24 percent. The firm can borrow perpetual debt at 6.4 percent. Currently, the firm is considering taking on debt equal to 72 percent of its unlevered value. What is the firm's levered value? Multiple Choice O O O $1,234,146 $1,164,997 $760,154 $963.199 5844,615
Marble Construction estimates that its WACC is 10% if equitycomes from retained earnings. However, if the company issues new stock to raise newequity, it estimates that its WACC will rise to 10.8%. The company believes that it willexhaust its retained earnings at $2,500,000 of capital due to the number of highly profitable projects available to the firm and its limited earnings. The company is considering the following7 investment projects: Assume that each of these projects is independent and that each is just as risky as the firm’sexisting assets. Which set of projects should be accepted, and what is the firm’s optimalcapital budget?
Company X is considering an expansion. The project has an estimated internal rate of return equal to 8%. The company has a debt to equity ratio equal to one. The yield to maturity on its bonds is 5%, while the cost of the company’s equity is estimated to be 15%. The company’s CEO, who is keen on the expansion project, argues that the project would be profitable if the company were to entirely finance it by issuing debt. The CFO, however, is sceptical and believes there is a logical flaw in the CEO’s argument. Who do you think is right? In no more than 200 words, give reasons for your answer by referencing relevant corporate finance theories.
Consider a firm that is currently all-equity financed. The firm produces a perpetual EBIT of $100m per annum and has an all-equity cost of capital (required return on equity) of 10 per cent. The corporate tax rate is 30 per cent, and the interest rate on debt is 3 per cent. The company is to be acquired under a LBO, under which an initial level of debt of $500m will be taken on, with repayment of $100m per year and interest on the principal at the end of each of years 1, 2, and 3. A level of debt of $200m will then be maintained in perpetuity. a. Calculate the present value of interest tax shield, you may assume that you can discount any debt-related cash flows at the cost of debt. b. Calculate the value of the firm before LBO c. Calculate the value of the firm following LBO using the APV method
ces NoNuns Companies has a 21 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $37 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Probability of state Expected EBIT in state Recession 0.25 $ 5 million EBIT Average 0.55 $ 10 million Boom 0.20 $ 17 million The firm is considering switching to a 20-percent-debt capital structure, and has determined that it would have to pay an 8 percent yield on perpetual debt in either event. What will be the break-even level of EBIT? Note: Round intermediate calculations. Enter your answer in dollars not millions and round your final answer to the nearest whole dollar amount.
Dyrdek Enterprises has equity with a market value of $10.9 million and the market value of debt is $3.60 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 1.7 percent. The new project will cost $2.22 million today and provide annual cash flows of $581,000 for the next 6 years. The company's cost of equity is 11.11 percent and the pretax cost of debt is 4.89 percent. The tax rate is 21 percent. What is the project's NPV? Multiple Choice $230,173 $375,414 $237,180 $219,241 $512,072
Bulldogs Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are P500,000; its fixed assets are P200,000; debt and equity are each 50% of total assets. EBIT is P40,000, the interest rate on the firm’s debt is 10%, and the firm’s tax rate is 25%. Current assets will be 10% of sales with a restricted policy. Under a relaxed policy, current assets will be 20% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies? 5.40% 3.57% 4.00% 3.20%
Suppose you are estimating the WACC for Columbus Inc. It has the following data from its balance sheet: total debt = $200 million; total equity=$120 million. It has 20 million shares outstanding, and its stock is trading at $32 per share. Your analysis shows that the company's current borrowing rate is 7%, and that the cost of equity is 13%. If the company marginal tax rate is 30%, what is its WACC?
Olsen Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and 35% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $4 million of retained earnings with a cost of rs = 10%. New common stock in an amount up to $9 million would have a cost of re = 13.0%. Furthermore, Olsen can raise up to $3 million of debt at an interest rate of rd = 11% and an additional $6 million of debt at rd = 15%. The CFO estimates that a proposed expansion would require an investment of $7.4 million. What is the WACC for the last dollar raised તો
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.)

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