The following information refers to Questions No. 13 through 15:The financial manager of Apple Co. is evaluating Banana Co. as a possibleacquisition. Banana Co. is expected to produce annual after-tax operatingcash flows of PI,500,000. Apple Co. will assume P1,000,000 of BananaCo.'s long-term liabilities. Apple Co.'s weighted average cost of capital is12% and Banana Co.'s weighted average cost of capital is 15%. Theacquisition will be evaluated as a perpetuity. Apple Co.'s common stock istrading at P25 per share with 1,000,000 shares outstanding and a P/E ratio of10. Banana Co.'s stock is trading at P15 per share with 600,000 sharesoutstanding and a P/E ratio of 15.Based on this information, the estimated market value of the target-company is nearestP 9,000,000.b.13.a.P10,000,000.P11,000,000.P11,500,000.с.d.

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 5P

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Fast Securities Ltd is looking into an investment of $100,000. The investment is expected to generate a net operating profit after tax (NOPAT) of $20,000. Given the firm’s weighted average cost of capital of 10% and tax rate of 20%, calculate the economic value added (EVA) of the investment. Should the firm accept or reject the investment? Give your reason(s).
Bob-Bye, Inc. has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The WACC is to be measured by using the following weights:: 40% long term debt, 10% preferred stock, and 50% common stock equity (retained earnings,new common stock or both). The firm’s tax is 30%. Debt: The firm can sell for P980, a 10-year, P1,000 par value bond paying annual interest at 13% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of P20 per bond. Preferred Stock: 8 percent (annual divided) preferred stock having a par value of P100 can be sold for P65. An additional fee of P2 per share must be paid to the underwriters. Common Stock: The firm’s common stock is currently selling for P50 per share. The dividend expected to be paid at the end of the coming year is P4 per share.. Its dividend payments which have been approximately 60% of earnings per share in each of the past 5…
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