Adequate information: Land price BO = 7,300,000 Current land value LV = 7,500,000 Land value in 5 years LV 5 = 7,900,000 Plant and equipment cost C P&E = $55,000,000 Bonds outstanding BO = 130,000 Coupon rate of Bond CR B = 6.10% Face value of Bond FV B = $2,000 Selling rate of Bond R B = 104% Price of Bond PV B = $2,080 Term duration of Bond T B = 25 years Number of compounding periods in a year N B = 2 Common stock outstanding SO CS = 9,900,000 Beta of the stock β CS = 1.20 Current price per share P CS = $68 Preferred stock outstanding SO PS = 400,000 Current rate of preferred stock CR PS = 4.20% Current price per share P PS = $87 Par value FV PS = $100 Risk-free rate R f = 3.10% Market risk premium R M = 7% Equity flotation cost f e = 6.50% Preferred flotation cost f p = 4.50% Debt flotation cost f d = 3% Tax rate t = 25% Net working capital NWC = $2,500,000 To compute: Initial Year 0 cash flow Introduction: Initial outlay refers to the capital requirements of the project such as initial investment, working capital, cost of land, etc.

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Answer 1

Question

Chapter 13, Problem 24QAP

a

Summary Introduction

Adequate information:

Land price $BO$ = 7,300,000

Current land value $LV$ = 7,500,000

Land value in 5 years $LV5$ = 7,900,000

Plant and equipment cost $CP&E$ = $55,000,000

Bonds outstanding $BO$ = 130,000

Coupon rate of Bond $CRB$ = 6.10%

Face value of Bond $FVB$ = $2,000

Selling rate of Bond $RB$ = 104%

Price of Bond $PVB$ = $2,080

Term duration of Bond $TB$ = 25 years

Number of compounding periods in a year $NB$ = 2

Common stock outstanding $SOCS$ = 9,900,000

Beta of the stock $βCS$ = 1.20

Current price per share $PCS$ = $68

Preferred stock outstanding $SOPS$ = 400,000

Current rate of preferred stock $CRPS$ = 4.20%

Current price per share $PPS$ = $87

Par value $FVPS$ = $100

Risk-free rate $Rf$ = 3.10%

Market risk premium $RM$ = 7%

Equity flotation cost $fe$ = 6.50%

Preferred flotation cost $fp$ = 4.50%

Debt flotation cost $fd$ = 3%

Tax rate $t$ = 25%

Net working capital $NWC$ = $2,500,000

To compute: Initial Year 0 cash flow

Introduction: Initial outlay refers to the capital requirements of the project such as initial investment, working capital, cost of land, etc.

b

Summary Introduction

Adequate information:

Adjustment factor (Risk premium) = 2%

To compute: Appropriate discount rate

Introduction: The adjusted weighted average cost of capital (WACC) refers to the discount rate that takes into consideration the risk premium.

c

Summary Introduction

Adequate information:

Life of plant = 8 years

Life of project = 5 years

Plant salvage value $SVP$ = $8,900,000

To compute: After-tax salvage value

Introduction: Salvage value refers to the value of the asset after depreciation.

d

Summary Introduction

Adequate information:

Annual fixed cost = $8,100,000

Number of RDS manufactured = 18,500

Sale price per RDS = $11,600

Variable costs per RDS = $9,750

To compute: Annual operating cash flow from this project

Introduction: Annual operating cash flow (OCF) refers to the cash generated by a firm using through day-to-day business operations.

e

Summary Introduction

To compute: Accounting Break-even

Introduction: The term Accounting break-even refers to the no profit, no loss stage wherein the company has recovered the cost incurred on the project but has not made any profit till now.

f

Summary Introduction

To compute: IRR and NPV

Introduction: Net present value refers to the difference between the present value of cash inflows and the initial outlay. Internal rate of return refers to the rate which make PNV zero.

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Answer 2

Question

Chapter 13, Problem 24QAP

a

Summary Introduction

Adequate information:

Land price $BO$ = 7,300,000

Current land value $LV$ = 7,500,000

Land value in 5 years $LV5$ = 7,900,000

Plant and equipment cost $CP&E$ = $55,000,000

Bonds outstanding $BO$ = 130,000

Coupon rate of Bond $CRB$ = 6.10%

Face value of Bond $FVB$ = $2,000

Selling rate of Bond $RB$ = 104%

Price of Bond $PVB$ = $2,080

Term duration of Bond $TB$ = 25 years

Number of compounding periods in a year $NB$ = 2

Common stock outstanding $SOCS$ = 9,900,000

Beta of the stock $βCS$ = 1.20

Current price per share $PCS$ = $68

Preferred stock outstanding $SOPS$ = 400,000

Current rate of preferred stock $CRPS$ = 4.20%

Current price per share $PPS$ = $87

Par value $FVPS$ = $100

Risk-free rate $Rf$ = 3.10%

Market risk premium $RM$ = 7%

Equity flotation cost $fe$ = 6.50%

Preferred flotation cost $fp$ = 4.50%

Debt flotation cost $fd$ = 3%

Tax rate $t$ = 25%

Net working capital $NWC$ = $2,500,000

To compute: Initial Year 0 cash flow

Introduction: Initial outlay refers to the capital requirements of the project such as initial investment, working capital, cost of land, etc.

b

Summary Introduction

Adequate information:

Adjustment factor (Risk premium) = 2%

To compute: Appropriate discount rate

Introduction: The adjusted weighted average cost of capital (WACC) refers to the discount rate that takes into consideration the risk premium.

c

Summary Introduction

Adequate information:

Life of plant = 8 years

Life of project = 5 years

Plant salvage value $SVP$ = $8,900,000

To compute: After-tax salvage value

Introduction: Salvage value refers to the value of the asset after depreciation.

d

Summary Introduction

Adequate information:

Annual fixed cost = $8,100,000

Number of RDS manufactured = 18,500

Sale price per RDS = $11,600

Variable costs per RDS = $9,750

To compute: Annual operating cash flow from this project

Introduction: Annual operating cash flow (OCF) refers to the cash generated by a firm using through day-to-day business operations.

e

Summary Introduction

To compute: Accounting Break-even

Introduction: The term Accounting break-even refers to the no profit, no loss stage wherein the company has recovered the cost incurred on the project but has not made any profit till now.

f

Summary Introduction

To compute: IRR and NPV

Introduction: Net present value refers to the difference between the present value of cash inflows and the initial outlay. Internal rate of return refers to the rate which make PNV zero.

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Answer 3

Question

Chapter 13, Problem 24QAP

a

Summary Introduction

Adequate information:

Land price $BO$ = 7,300,000

Current land value $LV$ = 7,500,000

Land value in 5 years $LV5$ = 7,900,000

Plant and equipment cost $CP&E$ = $55,000,000

Bonds outstanding $BO$ = 130,000

Coupon rate of Bond $CRB$ = 6.10%

Face value of Bond $FVB$ = $2,000

Selling rate of Bond $RB$ = 104%

Price of Bond $PVB$ = $2,080

Term duration of Bond $TB$ = 25 years

Number of compounding periods in a year $NB$ = 2

Common stock outstanding $SOCS$ = 9,900,000

Beta of the stock $βCS$ = 1.20

Current price per share $PCS$ = $68

Preferred stock outstanding $SOPS$ = 400,000

Current rate of preferred stock $CRPS$ = 4.20%

Current price per share $PPS$ = $87

Par value $FVPS$ = $100

Risk-free rate $Rf$ = 3.10%

Market risk premium $RM$ = 7%

Equity flotation cost $fe$ = 6.50%

Preferred flotation cost $fp$ = 4.50%

Debt flotation cost $fd$ = 3%

Tax rate $t$ = 25%

Net working capital $NWC$ = $2,500,000

To compute: Initial Year 0 cash flow

Introduction: Initial outlay refers to the capital requirements of the project such as initial investment, working capital, cost of land, etc.

b

Summary Introduction

Adequate information:

Adjustment factor (Risk premium) = 2%

To compute: Appropriate discount rate

Introduction: The adjusted weighted average cost of capital (WACC) refers to the discount rate that takes into consideration the risk premium.

c

Summary Introduction

Adequate information:

Life of plant = 8 years

Life of project = 5 years

Plant salvage value $SVP$ = $8,900,000

To compute: After-tax salvage value

Introduction: Salvage value refers to the value of the asset after depreciation.

d

Summary Introduction

Adequate information:

Annual fixed cost = $8,100,000

Number of RDS manufactured = 18,500

Sale price per RDS = $11,600

Variable costs per RDS = $9,750

To compute: Annual operating cash flow from this project

Introduction: Annual operating cash flow (OCF) refers to the cash generated by a firm using through day-to-day business operations.

e

Summary Introduction

To compute: Accounting Break-even

Introduction: The term Accounting break-even refers to the no profit, no loss stage wherein the company has recovered the cost incurred on the project but has not made any profit till now.

f

Summary Introduction

To compute: IRR and NPV

Introduction: Net present value refers to the difference between the present value of cash inflows and the initial outlay. Internal rate of return refers to the rate which make PNV zero.

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Answer 4

Question

Chapter 13, Problem 24QAP

a

Summary Introduction

Adequate information:

Land price $BO$ = 7,300,000

Current land value $LV$ = 7,500,000

Land value in 5 years $LV5$ = 7,900,000

Plant and equipment cost $CP&E$ = $55,000,000

Bonds outstanding $BO$ = 130,000

Coupon rate of Bond $CRB$ = 6.10%

Face value of Bond $FVB$ = $2,000

Selling rate of Bond $RB$ = 104%

Price of Bond $PVB$ = $2,080

Term duration of Bond $TB$ = 25 years

Number of compounding periods in a year $NB$ = 2

Common stock outstanding $SOCS$ = 9,900,000

Beta of the stock $βCS$ = 1.20

Current price per share $PCS$ = $68

Preferred stock outstanding $SOPS$ = 400,000

Current rate of preferred stock $CRPS$ = 4.20%

Current price per share $PPS$ = $87

Par value $FVPS$ = $100

Risk-free rate $Rf$ = 3.10%

Market risk premium $RM$ = 7%

Equity flotation cost $fe$ = 6.50%

Preferred flotation cost $fp$ = 4.50%

Debt flotation cost $fd$ = 3%

Tax rate $t$ = 25%

Net working capital $NWC$ = $2,500,000

To compute: Initial Year 0 cash flow

Introduction: Initial outlay refers to the capital requirements of the project such as initial investment, working capital, cost of land, etc.

b

Summary Introduction

Adequate information:

Adjustment factor (Risk premium) = 2%

To compute: Appropriate discount rate

Introduction: The adjusted weighted average cost of capital (WACC) refers to the discount rate that takes into consideration the risk premium.

c

Summary Introduction

Adequate information:

Life of plant = 8 years

Life of project = 5 years

Plant salvage value $SVP$ = $8,900,000

To compute: After-tax salvage value

Introduction: Salvage value refers to the value of the asset after depreciation.

d

Summary Introduction

Adequate information:

Annual fixed cost = $8,100,000

Number of RDS manufactured = 18,500

Sale price per RDS = $11,600

Variable costs per RDS = $9,750

To compute: Annual operating cash flow from this project

Introduction: Annual operating cash flow (OCF) refers to the cash generated by a firm using through day-to-day business operations.

e

Summary Introduction

To compute: Accounting Break-even

Introduction: The term Accounting break-even refers to the no profit, no loss stage wherein the company has recovered the cost incurred on the project but has not made any profit till now.

f

Summary Introduction

To compute: IRR and NPV

Introduction: Net present value refers to the difference between the present value of cash inflows and the initial outlay. Internal rate of return refers to the rate which make PNV zero.

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Answer 5

Chapter 13, Problem 24QAP

a

Summary Introduction

Adequate information:

Land price $BO$ = 7,300,000

Current land value $LV$ = 7,500,000

Land value in 5 years $LV5$ = 7,900,000

Plant and equipment cost $CP&E$ = $55,000,000

Bonds outstanding $BO$ = 130,000

Coupon rate of Bond $CRB$ = 6.10%

Face value of Bond $FVB$ = $2,000

Selling rate of Bond $RB$ = 104%

Price of Bond $PVB$ = $2,080

Term duration of Bond $TB$ = 25 years

Number of compounding periods in a year $NB$ = 2

Common stock outstanding $SOCS$ = 9,900,000

Beta of the stock $βCS$ = 1.20

Current price per share $PCS$ = $68

Preferred stock outstanding $SOPS$ = 400,000

Current rate of preferred stock $CRPS$ = 4.20%

Current price per share $PPS$ = $87

Par value $FVPS$ = $100

Risk-free rate $Rf$ = 3.10%

Market risk premium $RM$ = 7%

Equity flotation cost $fe$ = 6.50%

Preferred flotation cost $fp$ = 4.50%

Debt flotation cost $fd$ = 3%

Tax rate $t$ = 25%

Net working capital $NWC$ = $2,500,000

To compute: Initial Year 0 cash flow

Introduction: Initial outlay refers to the capital requirements of the project such as initial investment, working capital, cost of land, etc.

b

Summary Introduction

Adequate information:

Adjustment factor (Risk premium) = 2%

To compute: Appropriate discount rate

Introduction: The adjusted weighted average cost of capital (WACC) refers to the discount rate that takes into consideration the risk premium.

c

Summary Introduction

Adequate information:

Life of plant = 8 years

Life of project = 5 years

Plant salvage value $SVP$ = $8,900,000

To compute: After-tax salvage value

Introduction: Salvage value refers to the value of the asset after depreciation.

d

Summary Introduction

Adequate information:

Annual fixed cost = $8,100,000

Number of RDS manufactured = 18,500

Sale price per RDS = $11,600

Variable costs per RDS = $9,750

To compute: Annual operating cash flow from this project

Introduction: Annual operating cash flow (OCF) refers to the cash generated by a firm using through day-to-day business operations.

e

Summary Introduction

To compute: Accounting Break-even

Introduction: The term Accounting break-even refers to the no profit, no loss stage wherein the company has recovered the cost incurred on the project but has not made any profit till now.

f

Summary Introduction

To compute: IRR and NPV

Introduction: Net present value refers to the difference between the present value of cash inflows and the initial outlay. Internal rate of return refers to the rate which make PNV zero.

Answer 6

Chapter 13, Problem 24QAP

a

Summary Introduction

Adequate information:

Land price $BO$ = 7,300,000

Current land value $LV$ = 7,500,000

Land value in 5 years $LV5$ = 7,900,000

Plant and equipment cost $CP&E$ = $55,000,000

Bonds outstanding $BO$ = 130,000

Coupon rate of Bond $CRB$ = 6.10%

Face value of Bond $FVB$ = $2,000

Selling rate of Bond $RB$ = 104%

Price of Bond $PVB$ = $2,080

Term duration of Bond $TB$ = 25 years

Number of compounding periods in a year $NB$ = 2

Common stock outstanding $SOCS$ = 9,900,000

Beta of the stock $βCS$ = 1.20

Current price per share $PCS$ = $68

Preferred stock outstanding $SOPS$ = 400,000

Current rate of preferred stock $CRPS$ = 4.20%

Current price per share $PPS$ = $87

Par value $FVPS$ = $100

Risk-free rate $Rf$ = 3.10%

Market risk premium $RM$ = 7%

Equity flotation cost $fe$ = 6.50%

Preferred flotation cost $fp$ = 4.50%

Debt flotation cost $fd$ = 3%

Tax rate $t$ = 25%

Net working capital $NWC$ = $2,500,000

To compute: Initial Year 0 cash flow

Introduction: Initial outlay refers to the capital requirements of the project such as initial investment, working capital, cost of land, etc.

Answer 7

Chapter 13, Problem 24QAP

a

Summary Introduction

Adequate information:

Land price $BO$ = 7,300,000

Current land value $LV$ = 7,500,000

Land value in 5 years $LV5$ = 7,900,000

Plant and equipment cost $CP&E$ = $55,000,000

Bonds outstanding $BO$ = 130,000

Coupon rate of Bond $CRB$ = 6.10%

Face value of Bond $FVB$ = $2,000

Selling rate of Bond $RB$ = 104%

Price of Bond $PVB$ = $2,080

Term duration of Bond $TB$ = 25 years

Number of compounding periods in a year $NB$ = 2

Common stock outstanding $SOCS$ = 9,900,000

Beta of the stock $βCS$ = 1.20

Current price per share $PCS$ = $68

Preferred stock outstanding $SOPS$ = 400,000

Current rate of preferred stock $CRPS$ = 4.20%

Current price per share $PPS$ = $87

Par value $FVPS$ = $100

Risk-free rate $Rf$ = 3.10%

Market risk premium $RM$ = 7%

Equity flotation cost $fe$ = 6.50%

Preferred flotation cost $fp$ = 4.50%

Debt flotation cost $fd$ = 3%

Tax rate $t$ = 25%

Net working capital $NWC$ = $2,500,000

To compute: Initial Year 0 cash flow

Introduction: Initial outlay refers to the capital requirements of the project such as initial investment, working capital, cost of land, etc.

Answer 8

b

Summary Introduction

Adequate information:

Adjustment factor (Risk premium) = 2%

To compute: Appropriate discount rate

Introduction: The adjusted weighted average cost of capital (WACC) refers to the discount rate that takes into consideration the risk premium.

Answer 9

b

Summary Introduction

Adequate information:

Adjustment factor (Risk premium) = 2%

To compute: Appropriate discount rate

Introduction: The adjusted weighted average cost of capital (WACC) refers to the discount rate that takes into consideration the risk premium.

Answer 10

c

Summary Introduction

Adequate information:

Life of plant = 8 years

Life of project = 5 years

Plant salvage value $SVP$ = $8,900,000

To compute: After-tax salvage value

Introduction: Salvage value refers to the value of the asset after depreciation.

Answer 11

c

Summary Introduction

Adequate information:

Life of plant = 8 years

Life of project = 5 years

Plant salvage value $SVP$ = $8,900,000

To compute: After-tax salvage value

Introduction: Salvage value refers to the value of the asset after depreciation.

Answer 12

d

Summary Introduction

Adequate information:

Annual fixed cost = $8,100,000

Number of RDS manufactured = 18,500

Sale price per RDS = $11,600

Variable costs per RDS = $9,750

To compute: Annual operating cash flow from this project

Introduction: Annual operating cash flow (OCF) refers to the cash generated by a firm using through day-to-day business operations.

Answer 13

d

Summary Introduction

Adequate information:

Annual fixed cost = $8,100,000

Number of RDS manufactured = 18,500

Sale price per RDS = $11,600

Variable costs per RDS = $9,750

To compute: Annual operating cash flow from this project

Introduction: Annual operating cash flow (OCF) refers to the cash generated by a firm using through day-to-day business operations.

Answer 14

e

Summary Introduction

To compute: Accounting Break-even

Introduction: The term Accounting break-even refers to the no profit, no loss stage wherein the company has recovered the cost incurred on the project but has not made any profit till now.

Answer 15

e

Summary Introduction

To compute: Accounting Break-even

Introduction: The term Accounting break-even refers to the no profit, no loss stage wherein the company has recovered the cost incurred on the project but has not made any profit till now.

Answer 16

f

Summary Introduction

To compute: IRR and NPV

Introduction: Net present value refers to the difference between the present value of cash inflows and the initial outlay. Internal rate of return refers to the rate which make PNV zero.

Answer 17

f

Summary Introduction

To compute: IRR and NPV

Introduction: Net present value refers to the difference between the present value of cash inflows and the initial outlay. Internal rate of return refers to the rate which make PNV zero.

Answer 18

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Answer 19

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Answer 20

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Answer 21

Ch. 13 - Project Risk If you can borrow all the money you...Ch. 13 - WACC and Taxes Why do we use an aftertax figure...Ch. 13 - SML Cost or Equity Estimation If you use the stock...Ch. 13 - SML Cost or Equity Estimation What are the...Ch. 13 - Prob. 5CQ Ch. 13 - Cost of Capital Suppose Tom OBedlam, president of...Ch. 13 - Company Risk versus Project Risk Both Dow Chemical...Ch. 13 - Prob. 8CQ Ch. 13 - Leverage Consider a levered firms projects that...Ch. 13 - Beta What factors determine the beta of a stock?...

Solution Summary: The author explains that initial outlay refers to the capital requirements of the project such as initial investment, working capital, cost of land, etc.

Adequate information:

Adjustment factor (Risk premium) = 2%

To compute: Appropriate discount rate

Introduction: The adjusted weighted average cost of capital (WACC) refers to the discount rate that takes into consideration the risk premium.

Adequate information:

Life of plant = 8 years

Life of project = 5 years

Plant salvage value $SVP$ = $8,900,000

To compute: After-tax salvage value

Introduction: Salvage value refers to the value of the asset after depreciation.

To compute: Accounting Break-even

Introduction: The term Accounting break-even refers to the no profit, no loss stage wherein the company has recovered the cost incurred on the project but has not made any profit till now.

To compute: IRR and NPV

Introduction: Net present value refers to the difference between the present value of cash inflows and the initial outlay. Internal rate of return refers to the rate which make PNV zero.

Want to see the full answer?

Chapter 13 Solutions

Solution Summary: The author explains that initial outlay refers to the capital requirements of the project such as initial investment, working capital, cost of land, etc.

Adequate information: Adjustment factor (Risk premium) = 2% To compute: Appropriate discount rate Introduction: The adjusted weighted average cost of capital (WACC) refers to the discount rate that takes into consideration the risk premium.

To compute: Accounting Break-even Introduction: The term Accounting break-even refers to the no profit, no loss stage wherein the company has recovered the cost incurred on the project but has not made any profit till now.

To compute: IRR and NPV Introduction: Net present value refers to the difference between the present value of cash inflows and the initial outlay. Internal rate of return refers to the rate which make PNV zero.

Want to see the full answer?

Chapter 13 Solutions

Adequate information:

Adjustment factor (Risk premium) = 2%

To compute: Appropriate discount rate

Introduction: The adjusted weighted average cost of capital (WACC) refers to the discount rate that takes into consideration the risk premium.

To compute: Accounting Break-even

Introduction: The term Accounting break-even refers to the no profit, no loss stage wherein the company has recovered the cost incurred on the project but has not made any profit till now.

To compute: IRR and NPV

Introduction: Net present value refers to the difference between the present value of cash inflows and the initial outlay. Internal rate of return refers to the rate which make PNV zero.