Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
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
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Chapter 18, Problem 14QP
Summary Introduction
To determine: The NPV of the Project.
Introduction: A
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Estefan Industries has a new project available that requires an initial investment of $5.5 million. The project will provide unlevered cash flows of $854,000 per year for the next 20 years. The company will finance the project with a debt-value ratio of .35. The company’s bonds have a YTM of 7.5 percent. The companies with operations comparable to this project have unlevered betas of 1.05, .93, 1.20, and 1.15. The risk-free rate is 4.3 percent and the market risk premium is 6.4 percent. The tax rate is 24 percent. What is the NPV of this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
Dyrdek Enterprises has equity with a market value of $11.8 million and the market value of debt is $4.05million. The company is evaluating a new project thathas more risk than the firm. As a result, the companywill apply a risk adjustment factor of 2.1 percent. Thenew project will cost $2.40 million today and provideannual cash flows of $626, 000 for the next 6 years. Thecompany's cost of equity is 11.47 percent and thepretax cost of debt is 4.98 percent. The tax rate is 21percent. What is the project's NPV?
Dayton Mechanical, Inc. is currently evaluating a potential new investment. The investment will be financed with
5700,000 of debt and $1,200,000 of equity. The (unleveraged) after-lax cash flows, the CATs, expected to result from
the investment are $1 million per year for three years, after which time the project is expected to be sold off for a net
after-tax $1 million in cash. The debt financing will take the form of three-year debt with interest payments of 12% per
year on the remaining balance. Principal payments will be $100,000 in year 1, $200,000 in year 2, and $400,000 at the
end of year 3. The net-benefit-to-leverage factor, T^, is 0.25 for this investment. The (unleveraged) required return for
the project is 20%. What is the present value of the interest tax shield from the project?
Chapter 18 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 18 - APV How is the APV of a project calculated?Ch. 18 - WACC and APV What is the main difference between...Ch. 18 - FTE What is the main difference between the FTE...Ch. 18 - Prob. 4CQCh. 18 - Prob. 5CQCh. 18 - NPV and APV Zoso is a rental car company that is...Ch. 18 - APV Gemini, Inc., an all-equity firm, is...Ch. 18 - Prob. 3QPCh. 18 - Prob. 4QPCh. 18 - Prob. 5QP
Ch. 18 - Prob. 6QPCh. 18 - Prob. 7QPCh. 18 - WACC National Electric Company (NEC) is...Ch. 18 - WACC Bolero, Inc., has compiled the following...Ch. 18 - Prob. 10QPCh. 18 - Prob. 11QPCh. 18 - APV MVP, Inc., has produced rodeo supplies for...Ch. 18 - Prob. 13QPCh. 18 - Prob. 14QPCh. 18 - Prob. 15QPCh. 18 - Prob. 16QPCh. 18 - Prob. 17QPCh. 18 - Prob. 18QPCh. 18 - Prob. 1MC
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- 1. Alpha Moose Transporters is considering investing in a one-year project that requires an initial investment of $500,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is ________ (rounded to two decimal places). 2. Sunny Day Manufacturing Company has a current stock price of $22.35 per share, and is expected to pay a per-share dividend of $1.36 at the end of the year. The company’s earnings’ and dividends’ growth rate are expected to grow at the constant rate of 9.40% into the foreseeable future. If Sunny Day expects to incur flotation costs of 5.00% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be _______ . 3. Alpha Moose Transporters Co.’s…arrow_forwardPlease answer fast i give you upvote.arrow_forward6. Lucron Corp. is considering a project that will cost $310,000 and will generate after-tax cash flows of $96,000 per year for 5 years. The firm's WACC is 12% and its target D/E ratio is 2/3. The flotation cost for debt is 4% and the flotation cost for equity is 8%. What would be the new cost of the project after adjusting for flotation costs? A) $328,390 B$329,787 $331,197 D) $329,840 E) $290,160 7. When calculating weights for the WACC, it has become relatively common to use Net Debt. How is Net Debt calculated? A) Net Debt = Total amount of debt - Cash & Risk-Free Securities B) Net Debt = Total amount of debt + Cash & Risk-Free Securities C) Net Debt = Long-term Debt - Short-term Debt D) Net Debt Short-term Debt-Long-term Debt E) Net Debt- Long-term Debt-Short-term Debt + Cash & Risk-Free Securities Please use the following information to answer the next THREE questions. LNZ Corp. is thinking about leasing equipment to make tinted lenses. This equipment would cost $3,400,000 if…arrow_forward
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