The Blunt Trucking Company needs to expand its fleet by 40 percent to meet the demands of two major contracts it just received to transport military equipment from manufacturing facilities scattered across the United States to various military bases. The cost of the expansion is estimated to be $10 million. Blunt maintains a 30 percent debt ratio and pays out 50 percent of its earnings in common stock dividends each year. a. If Blunt earns S4 million in 2015, how much common stock will the firm need to sell in order to maintain its target capital structure? b. If Blunt wants to avoid selling any new stock but wants to maintain a constant dividend payout percentage of 50 percent, how much can the firm spend on new capital expenditures?

The Blunt Trucking Company needs to expand its fleet by 40 percent to meet the demands of two major contracts it just received to transport military equipment from manufacturing facilities scattered across the United States to various military bases. The cost of the expansion is estimated to be $10 million. Blunt maintains a 30 percent debt ratio and pays out 50 percent of its earnings in common stock dividends each year. a. If Blunt earns S4 million in 2015, how much common stock will the firm need to sell in order to maintain its target capital structure? b. If Blunt wants to avoid selling any new stock but wants to maintain a constant dividend payout percentage of 50 percent, how much can the firm spend on new capital expenditures?

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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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?
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Sunshine's sales are $625 million in the current fiscal year (which ends today) and are expected to grow 25% per year for the next three years, and then 4% per year (forever) once the company's growth moderates to a steady state. Sunshine’s current stock price is $14 per share, and the company has 175 million shares outstanding. Sunshine's growth has attracted the attention of one of its older and larger competitors: Coca Cola. Coke manufactures carbonated soft drinks, and would like to acquire a brand in the increasingly popular non-carbonated, healthy beverage category. Coke’s management has no intention of interfering with the production or marketing of Sunshine's drinks, but feels that as a more established competitor with significantly more proven relationships with retailers it can substantially lower Sunshine's distribution costs which are 7 cents per dollar of sales. Coke is confident that the most important synergy that it can realize from an acquisition of Sunshine is…
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Annamz Corp. is looking at two possible capital structures. Currently, the firm is an all-equity firm with $1.2 million dollars in assets and 200,000 shares outstanding. The market value of each stock is $6.00. The CEO of Annamz is thinking of leveraging the firm by selling $600,000 of debt financing. The cost of debt is 8% annually, and the current corporate tax rate for Annamz is 30%. What is the break-even EBIT for Annamz with these two possible capital structures?
Google has 15 million shares outstanding with a current market price of $2 per share. Google announces an investment in a project where the initial investment in year 0 is $5 million and the cash inflow for the next five years will be $3 million, after which the investment will generate no cash flows. Google’s discount rate for this project is 8%. What is the dollar increase in Google’s share price due to the undertaking this investment?
Based on market values, Gubler's Gym has an equity multiplier of 168 times. Shareholders require a return of 1179 percent on the company's stock and a pretax return of 5.06 percent on the company's debt. The company is evaluating a new project that has the same risk as the company itself. The project will generate annual aftertax cash flows of $321,000 per year for 9 years. The tax rate is 21 percent. What is the most the company would be willing to spend today on the project? Multiple Choice $1,802,338 $1,953,295 $1,919,325 $1,864,487 $2,264,479
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?

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