Not sure about #2 A firm must replace some of its aging manufacturing machinery. It is consideringbuying one of two machines. Machine A will cost $25,000 and then cost $10,000per year after-tax to operate for its three-year life. Machine B will cost $35,000and cost $6,000 per year after-tax to operate for its five-year life. The firm'srequired return on this type of investment is 12%. In either case, the machine willbe replaced at the end of its economic life for the foreseeable future. Based onthis information which should the firm choose?A onlyB onlyEither A or BNeither A nor B A firm is financed 100% with equity. The firm has two divisions. Division A is theproduction division. The division manager is proposing the firm accept Project Awhich has an IRR of 9.5%. The project has a beta of 0.7. Division B is thetechnology division. The manager of that division has proposed the firm acceptProject B which has an IRR of 12.5% since it meets the firm's overall WACC. Theproject has a beta of 1.4. There is also a third project under consideration, ProjectC, which straddles both divisions and has a beta of 1.1 and an IRR of 11.6%. Thecurrent risk free rate is 5% and the market risk premium is 6%. The firm's overallbeta is 1.1. None of the projects are mutually exclusive and all have normal cashflows. The firm's capital budget is not limited. Based on this information which, ifany, of the projects should the firm accept?A onlyB onlyC onlyNone of the above

IRR of a project means that at such IRR, the project will result in zero Net Present Value. In order…

Answered: A firm is financed 100% with equity.…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 18P

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Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.8, 1.2, 1.4, and 1.6, respectively. Assume all current and future projects will be financed with 30 percent debt and 70 percent equity, the current cost of equity (based on an average firm beta of 1.1 and a current risk-free rate of 6 percent) is 13 percent and the after-tax yield on the company’s bonds is 11 percent.What will the WACCs be for each division? (Do not round intermediate calculations. Round your final answers to 2 decimal places.) WACCs Division A % Division B % Division C % Division D %
Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.7, 1.3, 1.4, and 1.6, respectively. Assume all current and future projects will be financed with 25 percent debt and 75 percent equity, the current cost of equity (based on an average firm beta of 1.1 and a current risk-free rate of 3 percent) is 13 percent and the after-tax yield on the company's bonds is 8 percent. What will the WACCS be for each division? (Do not round intermediate calculations. Round your final answers to 2 decimal places.) WACCS Division A Division B % % Division C % Division D %
Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.9, 1.1, 1.3, and 1.5, respectively. If all current and future projects will be financed with 25 percent debt and 75 percent equity, and if the current cost of equity (based on an average firm beta of 1.2 and a current risk-free rate of 4 percent) is 12 percent and the after-tax yield on the company's bonds is 9 percent, what will the WACC's be for each division?
U.S. Robotics (USR) has a current (and target) capital structure of 70 percent common equity and 30 percent debt. The beta for USR is 1.2. USR is evaluating an investment in a totally new line of business. The new investment has an expected internal rate of return of 23 percent. USR wishes to evaluate this investment proposal. If the investment is made, USR intends to finance the project with the same capital structure as its current business. USR's marginal tax rate is 34 percent. USR has identified three firms that are primarily in the line of business into which USR proposes expanding. Their average beta is 1.5, and their average capital structure is 45 percent common equity and 55 percent debt. The marginal tax rate for these three firms averages 40 percent. The risk-free rate is 6 percent, and the expected market risk premium is 8.6 percent. Should USR undertake the project? Round your answer to one decimal place. The project should be accepted for any after- tax cost of debt of…
A company is going to open a new division. The division will be financed with $1 million in debt and $3 million in equity. The tax rate is 15% for all firms. The risk-free rate is 1% and market portfolio return is 7%. The yield on the division's debt is 4%. The information on the relevant pure play companies is given below: Pure Play Firm A B Beta 5.2 1.5 0.8 What is the new division's WACC? Debt/Equity 0.6 0.2
m. Jana is interested in establishing a new division that will focus primarily on developing new Internet-based projects. In trying to determine the cost of capital for this new division, you discover that specialized firms involved in similar projects have, on average, the following characteristics: Their capital structure is 10% debt and 90% common equity; their cost of debt is typically 12%; and they have a beta of 1.7. Given this information, what would your estimate be for the new divisions cost of capital?
Venus Projects LLC takes on various projects to increase their revenues or cut down costs. A great new business idea may require, for example, investing in the development of a new product or new Projects. Venus Projects LLC can accept any project which has an Internal Rate of Return above 10%. In capital budgeting, senior leaders like to know the estimated return on such investments. The internal rate of return is one method that allows them to compare and rank projects based on their projected yield. The investment with the highest internal rate of return is usually preferred. Calculate Internal Rate of Return (IRR) from the following Information Round off the final Answer Initial Investment = 95000 Salvage Value = 5000 The Life of Machine is 5 Years The Cash Flows after Depreciation and Tax (CFAT) are as follows Year 1 - 29500 Year 2 - 23100 Year 3 -25000 Year 4 -22700 Year 5 -24700 You can choose the Lower rate as 8 % and Higher rate as 12% . a. 17% and accept the…
The manager of a small firm wants to know which among the three different projects should the company enter into. Details of the three projects are as follows: JOJO GINA MARIA LORINDA KANOR Initial investment P 120,000 P 125,000 P 180,000 P160,000 P35,000 Net present value 25,000 24,000 45,000 35,000 10,000 Internal rate of return 10% 15% 12% 8% 9% Profitability index 1.21 1.19 1.25 1.22 1.29 If the management has a budget of P500,000 only, which projects would be undertaken? a. Jojo, Gina, Lorinda, and Kanor b. Gina, Maria, Lorinda, and Kanor c. Jojo, Maria, Lorinda, and Kanor d. Jojo, Gina, Maria, and Kanor
Global Exchange has three divisions: A, B, and C. Division A has the least risk and division C has the most risk. The firm has an aftertax cost of debt of 6.1 percent and a cost of equity of 14.3 percent. The fırm is financed with 35 percent debt and 65 percent equity. Division A's projects are assigned a discount rate that is 2 percent less than the firm's weighted average cost of capital. What is the discount rate applicable to division A? O 7.98 percent O 8.27 percent O 9.43 percent O 11.48 pércent O 13.43 percent
A company estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept? A) Project C, which is of above-average risk and has a return of 11%. B) All of the projects should be accepted. C)Project A, which is of average risk and has a return of 9%. D)None of the projects should be accepted. E)Project B, which is of below-average risk and has a return of 8.5%.
Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm’s cost of capital, r, is 10%, and the risk-free rate, RF, is 2%. The firm has estimated each project’s cash flow and each project’s beta, as shown in the following table. Project (j) E F G Initial investment (CF0) -$15,000 -$11,000 -$19,000 Year (t) Cash inflows (CFt) 1 $6,000 $6,000 $ 4,000 2 6,000 4,000 6,000 3 6,000 5,000 8,000 4 6,000 2,000 12,000 Beta 1.80 1.00 0.60 a. Find the NPV of each project, using the firm’s cost of capital. Which project is preferred in this situation? b. The firm uses the following equation to determine the risk-adjusted discount rate, RADRj, for each project j: RADRj = RF + Bj x (rm -RF) Where RF = risk-free rate 2% Bj = beta of project j RADRj = risk-adjusted discount rate for project j rm = expected return on market portfolio 10% Substitute each project’s beta into this equation to determine its RADR. c. Use the RADR for each project to…
A production machinery system may be purchased either from either Hillebrand Corporation or Lotux Corporation. The Hillebrand system has an IRR of 30.5 and the Lotux system has an IRR of 40.8. The two projects happen to have equal net present value at a discount rate of 22.25%. The firms cost of capital is 18 percent. Explain with a graph, which project creates more value and which project should be chosen.

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