Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Textbook Question
Chapter 11, Problem
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of $170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be $138 per case, and the Year-1 cost per case will be $105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be
- a. What is the
present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find itsNPV .) What is the NPV? - b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the project’s NPV?
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Students have asked these similar questions
Eccles Inc., a zero-growth firm, has an expected EBIT of $100.000 and a corporate tax rate of 30%. Eccles uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.
If the effective personal tax rates on debt income and stock income are Td = 25% and TS = 20% respectively, what is the value of the firm according to the Miller model (Based on the same unlevered firm value in the earlier question)?
a. $475,875
b. $536,921
c. $587,750
d. $623,050
e. $564,167
Refer to the data for Eccles Inc. earlier. If the effective personal tax rates on debt income and stock income are Td = 25% and TS = 20% respectively, what is the value of the firm according to the Miller model (Based on the same unlevered firm value in the earlier question)?
a. $475,875
b. $536,921
c. $587,750
d. $623,050
O $564,167
Warren Supply Inc. wants to use debt and common equity for its capital budget of $800,000 in the coming year, but it will not issue any new common stock. It is forecasting an EPS of $3.00 on its 500,000 outstanding shares of stock and is committed to maintaining a $2.00 dividend per share. Given these constraints, what percentage of the capital budget must be financed with debt?
a. 33.84%
b. 37.50%
c. 32.15%
d. 30.54%
e. 35.63%
Chapter 11 Solutions
Financial Management: Theory & Practice
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