Turnbull Co. is considering a project that requires an initial investment of $570,000. The firm will raise the $570,000 in capital by issuing $230,000 ofdebt at a before-tax cost of 9.6%, $20,000 of preferred stock at a cost of 10.7%, and $320,000 of equity at a cost of 13.5%. The firm faces a tax rateof 25%. What will be the WACC for this project? 10.86% (Note: Round your intermediate calculations to three decimal places.)Consider the case of Kuhn Co.Kuhn Co. is considering a new project that will require an initial investment of $45 million. It has a target capital structure of 58% debt, 6% preferredstock, and 36% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rateof 10%, and a market price of $1,050.76. The yield on the company's current bonds is a good approximation of the yield on any new bonds that itissues. The company can sell shares of preferred stock that pay an annual dividend of $8 at a price of $92.25 per share.Kuhn does not have any retained earnings available to finance this project, so the firm will have to issue new common stock to help fund it. Itscommon stock is currently selling for $22.35 per share, and it is expected to pay a dividend of $1.36 at the end of next year. Flotation costs willrepresent 8% of the funds raised by issuing new common stock. The company is projected to grow at a constant rate of 9.2%, and they face a tax(Note: Round your intermediate calculations to two decimal places.)rate of 25%. What will be the WACC for this project?

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Turnbull Co, is considering a project that requires an initial investment of $570,000. The firm will raise the $570,000 in capital by issuing $230,000 of debt at a before-tax cost of 9.6%, $20,000 of preferred stock at a cost of 10.7%, and $320,000 of equity at a cost of 13.5%. The firm faces a tax rate of 25%, what will be the WACC for this project? 10.86% (Note: Round your intermediate calculations to three decimal places.)

Turnbull Co, is considering a project that requires an initial investment of $570,000. The firm will raise the $570,000 in capital by issuing $230,000 of debt at a before-tax cost of 9.6%, $20,000 of preferred stock at a cost of 10.7%, and $320,000 of equity at a cost of 13.5%. The firm faces a tax rate of 25%, what will be the WACC for this project? 10.86% (Note: Round your intermediate calculations to three decimal places.)

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

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Suppose there are two alternatives to finance a power generation project planned by ABC (Pvt.) Ltd. Alternative A is to financing the total capital of Rs. 450 Mn with equity and Alternative B is to employ Rs.150 Mn equity, Rs. 100 Mn by 14% debentures and the rest by a 15% bank loan. The corporate tax rate is 30% and the owners expects 18% dividend in both alternatives. Earnings before interest and tax (EBIT) for the project is estimated as Rs.250 Mn. a. Calculate weighted average cost of capital (WACC) for both alternatives.
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?
Bhupatbhai
CIP Co, a telecommunications company, is considering an investment of $150 million into a wind farm. The wind farm is expected to generate after-tax cash flows of $75 million in Year 1, $120 million in Year 2, and $175 million in Year 3. CIP Co’s WACC is 12% but some members of management believe the project should be assessed using a discount rate of 15% (which is what Major Bank Ltd advises is a typical discount rate for a wind farm project). The company has spent $15 million up to today researching this opportunity. What is NPV?
The Hartley Hotel Corporation is planning a major expansion. Hartley is financed 100 percent with equity and intends to maintain this capital structure after the expansion. Hartley’s beta is 1. The expected market return is 18 percent, and the risk-free rate is 9 percent. If the expansion is expected to produce an internal rate of return of 17 percent, should Hartley make the investment? Round your answer to one decimal places. Based on the cost of capital of %, Hartley invest.
The Hartley Hotel Corporation is planning a major expansion. Hartley is financed 100 percent with equity and intends to maintain this capital structure after the expansion. Hartley’s beta is 0.8. The expected market return is 15 percent, and the risk-free rate is 8 percent. If the expansion is expected to produce an internal rate of return of 14 percent, should Hartley make the investment? Round your answer to one decimal places. Based on the cost of capital of ________ %, Hartley should invest ____ or not invest ______
Orchard Farms has a pretax cost of debt of 7.68 percent and a cost of equity of 15.2 percent. The firm uses the subjective approach to determine project discount rates. Currently, the firm is considering a project to which it has assigned an adjustment factor of -0.5 percent. The firm's tax rate is 34 percent and its debt-equity ratio is 0.45. The project has an initial cost of $4.3 million and produces cash inflows of $1.27 million a year for 5 years. What is the net present value of the project
Duke Inc. is considering to change its capital structure of a $1 million:$3 million debt-equity mix (in terms of market values), by taking out a $3 million loan which is used to pay a large dividend to shareholders. The firm’s tax rate is 40%. After the dividend has been paid, what will be the firm’s total equity value?
Sierra Vista Industries (SVI) wishes to estimate its cost of capital for the use in the analyzing projects that are similar to those that already exist. The firm’s current capital structure in terms of market value includes 40 percent debt, 10 percent preference shares and 50 percent ordinary shares. The firm’s debt has as average yield to maturity of 8.3 percent. Its preference shares have a GH¢ 70 par value, an 8 percent dividend, and are currently selling for GH¢ 76 per share. SVI’s beta is 1.05, risk-free rate is 4 percent and return on the S&P 500 (the market proxy) is 11.4 percent. SVI is in the 40 percent marginal tax bracket. 1. what are SVI’s pre-tax costs of debt, preference shares and ordinary shares? 2. Calculate SVI’s weighted average cost of capital (WACC) on both a pre-tax and an after-tax basis. Which WACC should SVI use when making investment decisions? 3. SVIS is contemplating a major investment that is expected to increase both its operation and financial…
Mary, Inc. is considering a project for next year, which will cost $5 million. Mary plans to use the following combination of debt and equity to finance the investment. Issue $1.5 million of 10-year bonds at a price of 101, with a coupon/contract rate of 4%, and flotation costs of 2% of par. Use $3.5 million of funds generated from retained earnings. The equity market is expected to earn 8%. U.S. Treasury bonds are currently yielding 3%. The beta coefficient for Mary, Inc. is estimated to be .70. Mary is subject to an effective corporate income tax rate of 30 percent. Compute Mary's expected rate of return using the Capital Asset Pricing Model (CAPM). Please show calculations.
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
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