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Use the information for the question(s) below. Omicron Industries Market Value Balance Sheet 5 Millions) and Cost of Capital Assets Cash Other Assets Free Cash Flows 0 500 x Liabilities Omicron Industries New Project Free Cash Flows (Millions) 0 3 $50.00 million $67.25 million $38.50 million $10.25 million 1 Debt 200 Equity 300 40 2 sh Flows (100) The debt capacity for Omicron's new project in year 0 is closest to: 50 Cost of Capital 60 TC Debt 6% Equity 12%

Use the information for the question(s) below. Omicron Industries Market Value Balance Sheet 5 Millions) and Cost of Capital Assets Cash Other Assets Free Cash Flows 0 500 x Liabilities Omicron Industries New Project Free Cash Flows (Millions) 0 3 $50.00 million $67.25 million $38.50 million $10.25 million 1 Debt 200 Equity 300 40 2 sh Flows (100) The debt capacity for Omicron's new project in year 0 is closest to: 50 Cost of Capital 60 TC Debt 6% Equity 12%

Essentials Of Investments
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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### Question 11 #### Use the information for the question(s) below. --- **Omicron Industries’ Market Value Balance Sheet ($ Millions) and Cost of Capital** | Assets | Liabilities | | Cost of Capital | |--------------|-------------|---------------|-----------------| | Cash | 0 Debt 200 | | Debt 6% | | Other Assets | 500 Equity | | Equity 21% | **Omicron Industries’ New Project Free Cash Flows ($ Millions)** | Year | 0 | 1 | 2 | 3 | |------|--------|----|----|----| | Free Cash Flows | (100) | 40 | 50 | 60 | --- **The debt capacity for Omicron’s new project in year 0 is closest to:** - \( \quad \) \$50.00 million - \( \quad \) \$67.25 million - \( \quad \) \$38.50 million - \( \quad \) \$10.25 million - \( \quad \) \$75.50 million --- #### Explanation To find the debt capacity for Omicron's new project, we evaluate the information provided in the balance sheet and the expected free cash flows from the new project. 1. **Balance Sheet Overview:** - **Cash:** $0 million - **Other Assets:** $500 million - **Total Assets:** $500 million - **Total Liabilities:** $200 million in Debt - **Equity:** $300 million - **Cost of Capital:** Debt at 6%, Equity at 21% 2. **Free Cash Flows from the New Project:** - Year 0: \(\$ -100 \text{ million}\) - Year 1: \(\$ 40 \text{ million}\) - Year 2: \(\$ 50 \text{ million}\) - Year 3: \(\$ 60 \text{ million}\) The project requires an initial investment of $100 million in Year 0, and the debt capacity would need to be sufficient to cover this initial investment to be viable. Based on the provided information and calculated estimates, the closest debt capacity for Omicron’s new project in Year 0 is marked as $67.25 million. *
Transcribed Image Text:### Question 11 #### Use the information for the question(s) below. --- **Omicron Industries’ Market Value Balance Sheet ($ Millions) and Cost of Capital** | Assets | Liabilities | | Cost of Capital | |--------------|-------------|---------------|-----------------| | Cash | 0 Debt 200 | | Debt 6% | | Other Assets | 500 Equity | | Equity 21% | **Omicron Industries’ New Project Free Cash Flows ($ Millions)** | Year | 0 | 1 | 2 | 3 | |------|--------|----|----|----| | Free Cash Flows | (100) | 40 | 50 | 60 | --- **The debt capacity for Omicron’s new project in year 0 is closest to:** - \( \quad \) \$50.00 million - \( \quad \) \$67.25 million - \( \quad \) \$38.50 million - \( \quad \) \$10.25 million - \( \quad \) \$75.50 million --- #### Explanation To find the debt capacity for Omicron's new project, we evaluate the information provided in the balance sheet and the expected free cash flows from the new project. 1. **Balance Sheet Overview:** - **Cash:** $0 million - **Other Assets:** $500 million - **Total Assets:** $500 million - **Total Liabilities:** $200 million in Debt - **Equity:** $300 million - **Cost of Capital:** Debt at 6%, Equity at 21% 2. **Free Cash Flows from the New Project:** - Year 0: \(\$ -100 \text{ million}\) - Year 1: \(\$ 40 \text{ million}\) - Year 2: \(\$ 50 \text{ million}\) - Year 3: \(\$ 60 \text{ million}\) The project requires an initial investment of $100 million in Year 0, and the debt capacity would need to be sufficient to cover this initial investment to be viable. Based on the provided information and calculated estimates, the closest debt capacity for Omicron’s new project in Year 0 is marked as $67.25 million. *
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