Verano Inc. has two business divisions -a software product line and a waste water clean-up product line. The software business has a cost of equity capital of 14% and the waste water clean-up business has a cost of equity capital of 6%. Verano has 50% of its revenue from software and the rest from the waste business. Verano is considering a purchase of another company in the waste water business using equity financing. What is the appropriate cost of capital to evaluate the business? O A. 10% O B. 6% OC. 9% on 14%

Verano Inc. has two business divisions -a software product line and a waste water clean-up product line. The software business has a cost of equity capital of 14% and the waste water clean-up business has a cost of equity capital of 6%. Verano has 50% of its revenue from software and the rest from the waste business. Verano is considering a purchase of another company in the waste water business using equity financing. What is the appropriate cost of capital to evaluate the business? O A. 10% O B. 6% OC. 9% on 14%

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

See similar textbooks

Similar questions

In your internship, the financial manager of "ABC" firm, specialized in the production and commercialization of car batteries, asks you to evaluate whether the firm creates value for its shareholders. The cost of capital is 10%. Sales $700,000; Cost of Goods Sold (COGS) $250,000; SG&A Expenses $10,000; Depreciation $50,000; Other Operating Expenses $10,000; Financial charges $2,000. The total invested capital is $750,000. The Corporate Tax rate is 40%. 1- Calculate the net operating profit after taxes (NOPAT). 2- Calculate the company's Economic value added (EVA). Interpret. 3- If the future EVAS are expected to grow at a constant growth rate of 12% for the next three years, calculate the market value added (MVA). Interpret.
Allied Food Products is considering expanding into the fruit juice business with a new fresh lemon juiceproduct. Assume that you were recently hired as assistant to the director of capital budgeting, and youmust evaluate the new project.The lemon juice would be produced in an unused building adjacent to Allied’s Fort Myers plant; Alliedowns the building, which is fully depreciated. The required equipment would cost $450,000, plus anadditional $38,000 for shipping and installation. In addition, inventories would rise by $40,000, whileaccounts payable would increase by $10,000. All of these costs would be incurred at t = 0. By a specialruling, the machinery could be depreciated under the MACRS system as 4-year property. The applicabledepreciation rates are 40%, 30%, 20%, and 10%.The project is expected to operate for 4 years, at which time it will be terminated. The cash inflows areassumed to begin 1 year after the project is undertaken (t = 1), and to continue out to t = 4. At the endof…
During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis’ cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: •The firm’s tax rate is 35%. •The current price of Harry Davis’ 12.5% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1105.67. Harry Davis does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. •The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $114.27. Harry Davis would incur flotation costs…
XYZ, Co. has conducted extensive market analysis on a market expansion at the cost of $2 million. If they proceed, they will have to purchase land at $650,000, build a structure costing $4 million, equip the structure at a cost of $161,000, train the staff at a cost of $50,000 and fund working capital of $1 million. New revenues will be about $2.3 million with variable costs at 60% of sales. Which of these costs would be included in the cash flows of time zero and what should be included in the depreciable basis?
In this assignment, you have been brought in to assess whether Nucor should be the first adopter of a new technology. This requires a $340 million investment in a commercially unproven technology. If successful, Nucor can expand into the flat sheet segment that was previously a segment where only the large integrated steelmakers competed. This assignment requires that you combine qualitative information (e.g., industry and firm insights) with quantitative analysis in Excel (discounted cash flow analysis). After you read the case, answer both questions: background analysis and cash flow analysis. For cash flow analysis, you need to do calculations using Excel file attached in the assignment on Blackboard. Once you finished your calculations using Excel file, you can answer your second part of the assignment. Background Analysis (20 points) Industry: Of the three groups of steelmakers, what are some of the differences between integrated steelmakers and minimill steelmakers? Nucor: What…
Isaac Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. The firm will choose only one because both forklifts perform the same function. (They are mutually exclusive investments.) The electric-powered truck will cost more but will be less expensive to operate; it will cost $22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies to both investments is 18%. The life for both types of truck is estimated to be six years, during which time the net cash flows for the electric-powered truck will be $7,290 per year, and those for the gas-powered truck will be $6,000 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck and decide which to recommend. Compute the NPV for each truck. Compute the IRR for each truck. Compute the crossover rate. Compute the payback period for each truck. Compute the profitability index for each truck.
Speckle Delivery Systems can buy a piece of equipment that is anticipated to provide an 8% return and can be financed at 5% with debt. Later in the year, the company turns down an opportunity to buy a new machine that would yield a 15% return but would cost 17% to finance through common equity. Assume debt and common equity each represent 50% of the company’s capital structure. Compute the weighted average cost of capital (WACC). Which product(s) should be accepted in your opinion? Why?
Please show all working and interpretation plus clear calculations with formulas used. Thanks
Involves the purchase of a lumber mill operation located in Nova Scotia. You have estimated the initial investment as $1,000,000 and the annual pre-tax cash flow over the next 10 years as $200,000 at which point the operation will be obsolete. If GBEI decides to invest in the lumber mill operation, it will be financed using the same proportions of debt and equity that GWEI currently uses. You have collected information on a publicly-traded lumber products company whose primary line of business is similar to GBEI’s lumber mill operation – this has led you to recommend a discount rate of 11.27% for this investment. Assume straight line depreciation. 1. Calculate the NPV, Payback Period, and Profitability Index of the lumber mill operation.
Quentin, a Financial Manager, has been approached by five different subsidiaries cach of whom are recommending investment in a new business line. Quentin has estimated the relevant cash flows in the table below and is presenting his results to the Board for approval. For each project he has estimated the present value of the cost of the project and also the present value of future income flows. The five projects are all divisible and the company uses 12% as the discount rate for projects of this nature. Project Cost (£) 240,000 330,000 270,000 375,000 210,000 PV (£) 315,000 343,500 390,000 345,000 300,000 B D a) Explain the differences and similarities between net present value (NPV) and the profitability index (P). Calculate the profitability index for each of the five projects and rank the projects in the order of preference that would maximise shareholders wealth. b) c) Calculate the NPV for each of the five projects and rank the projects in the order of preference that would…

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS