QUESTION 5You are Chief Financial Officer of the ABC Corporation. ABC has two divisions, one of which is retail, and the other is manufacturing.ABC's debt-equity ratio (measured at market value) is one half. The company has $2.5 billion in face value of perpetual bonds whichpay an annual coupon of 4% and have a yield to maturity of 10%. ABC's equity has a beta of 1.25. The company faces a 35% taxrate.The risk-free rate of return is 5.6% and the market risk premium, over and above the risk-free rate, is 8%.The company is considering a business expansion in the retail industry. The expansion project will generate $20 million free cashflow per year indefinitely. ABC is planning to maintain the industry average leverage ratio for the expansion project.Companies that operate purely in the manufacturing industry have an average beta of 0.8 and an average debt-equity ratio(measured at market value) of three quarter.Companies that operate purely in the retail industry have an average beta of 1.8 and an average debt-equity ratio (measured atmarket value) of one quarter.What is ABC's weighted average cost of capital (WACC) for the capacity expansion project?a. 13.0%Ob.9.6%O c. 17.3%Od. 15.0%e. 12.6%

WACC = weight of equity*cost of equity + weight of debt*cost of debt cost of equity is calculated by…

Answered: What is ABC's weighted average cost of…

What is ABC's weighted average cost of capital (WACC) for the capacity expansion project? a. 13.0% O b.9.6% C. 17.3% d. 15.0% e. 12.6%

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

EBITDA multiple Terminal value in 2027 8.0 x Present value of terminal value Present value of stage 1 cash flows Enterprise value (stage 1 + 2) 6,621,062 Using the above information, what is the enterprise value of the firm if the cost of capital is 10%?
What is the NPV of the estimated cash flows for the following project using a Weighted Average Cost of Capital of 7.0%? Year 0 1 2 3 Cash Flow -140 50 70 90 Group of answer choices 47.54 38.63 59.94 70.00 41.34
4. We only have OMR 800,000 to invest. Which do we select based on Weighted average profitability index method ? Project NPV Investment PI A 430,000 500,000 B 241,250 225,000 C 394,250 375,000 D 262,000 575,000
Net Present Value Method, Present Value Index, and Analysis for a service company Continental Railroad Company is evaluating three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows: MaintenanceEquipment RampFacilities ComputerNetwork Amount to be invested $591,053 $351,873 $159,991 Annual net cash flows: Year 1 251,000 171,000 103,000 Year 2 233,000 154,000 71,000 Year 3 213,000 137,000 52,000 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162 Required: 1. Assuming that the desired rate…
What is the weighted average cost of capital (WACC)? The cost of all of the capital for a project or company The cost of all of the equity for a project or company The cost of all of the debt for a project or company The cost of all of the venture capital for a project or company
Consider the following projects: Project Co C₁ Cash Flows ($) C2 C3 CA C5 A -1,300 1,300 0 0 0 0 B -2,600 1,300 1,300 4,300 1,300 1,300 C -3,250 1,300 1,100 0 1,300 1,300 a. If the opportunity cost of capital is 9%, which project(s) have a positive NPV? b. Calculate the payback period for each project. c. Which project(s) would a firm using the payback rule accept if the cutoff period is three years? Complete this question by entering your answers in the tabs below. Required A Required B Required C If the opportunity cost of capital is 9%, which project(s) have a positive NPV? Note: Do not round intermediate calculations. Positive NPV project(s) Projects B and C Required A Required B
A firm has projected the following financials for a possible project: YEAR Sales Cost of Goods S&A Depreciation Investment in NWC Investment in Gross PPE 0 1,130.00 105,468.00 1 132,716.00 Submit 549.00 2 62,780.00 62,780.00 30,000.00 30,000.00 30,000.00 21,093.60 21,093.60 21,093.60 Answer format: Currency: Round to: 2 decimal places. 3 132,716.00 132,716.00 132,716.00 549.00 What is the NPV of the project? (Hint: Be careful about rounding the WACC here!) 4 62,780,00 62,780.00 62,780.00 30,000.00 549.00 21,093.60 549.00 5 132,716.00 The firm has a capital structure of 37.00% debt and 63.00% equity. The cost of debt is 9.00%, while the cost of equity is estimated at 15.00%. The tax rate facing the firm is 38.00%. (Assume that you can't recover the final NWC position in year 5. i.e. only consider the change in NWC for each year) 30,000.00 21,093.60 549.00
Net Present Value Method, Present Value Index, and Analysis First United Bank Inc. is evaluating three capital investment projects using the net present value method. Relevant data related to the projects are summarized as follows: BranchOfficeExpansion ComputerSystemUpgrade ATMKioskExpansion Amount to be invested $863,421 $519,486 $311,214 Annual net cash flows: Year 1 358,000 243,000 165,000 Year 2 333,000 219,000 114,000 Year 3 304,000 194,000 83,000 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162 Required: 1. Assuming that the desired rate of return is 6%,…
question b only please (at the very end of the page)
can u make the npv, using this format 1 2 3 4 5 Net income 5,175,140.21 5,448,761.67 5,709,496.33 7,789,606.88 6,251,091.31 PV 12%
Question 4 Mooradian Corporation estimates that its weighted average cost of capital is 17.8 percent. The company is considering two mutually exclusive projects whose after-tax cash flows are as follows: Year 0 1 2 3 4 O 42.11%; Yes O 43.11%; Yes What is the modified internal rate of return (MIRR) of the project with the highest NPV? Should this project be accepted? 44.11%; No 45.11%; Yes Project S CF ($3,172) $2,950 $2,766 $1,990 $1,931 O 45.11%; No Project L CF ($4,938) $1,552 $2,468 $4,409 $2,035
BIE The Cost of Capital: Weighted Averige cost of capital The firm's target capital structure is the mix of debt, presured stack, and common equity the firm plans to mise funds for future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these I components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common study then the cost of retained earnings is used in the firm's WACC calculation. However, if the firm will I have to issue new common stock, the cost of new common stock should be used in the firm's WALC calculation. Barton Industines expects that its target capital Structure for finds in the future for its raising capital budget will consist of 40% debt, 5% prefence stock, and 55% common equity. Note that the firm's marginal tax rate is 25%. Assume that the firm's cost of debt, rd is 10.0%, the firm's cost of preferred stock, rp is 9.2.%. and the firm's cost of…

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