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QUESTION THREE
A. The Manix Company was recently formed to manufacture a new product. It has the following capital structure in market value terms:
K
Debentures 6,000,000
Common stock (320,000 shares) 8,000,000
Total. 16,000,000
The company has a marginal tax rate of 40 percent. A study of publicly held companies in this line of business suggests that the required
Required
Calculate the firm’s present weighted average cost of capital
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Step by stepSolved in 6 steps with 4 images
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- QUESTION 19 Use the corporate valuation model to find the intrinsic value of a firm with a long-run growth in FCF of 5.75% and a WACC of 8.12%. The firm has $45 million in debt and preferred stock and has 4.5 million shares of common stock. The FCF for the first 4 years are (in millions of dollars): -$15, $12, $14, $19. OA. $63.90 B. $84.60 OC. $132.61 OD. $154.33arrow_forward6arrow_forwardThe asset of a firm is financed by $100,000 Common Equity, $100,000 Preferred Stock, and $300,000 Bonds. The Weighted Average Cost of Capital (WACC) is 10%. Given that the asset is likely to generate Net Operating Profit After Tax of $100,000. What would be the firm’s EVA? Question 5 options: 1) $5,000 2) $50,000 3) $20,000 4) None of the above.arrow_forward
- QUESTION 5 You are Chief Financial Officer of the ABC Corporation. ABC has two divisions, one of which is retail, and the other is manufacturing. ABC's debt-equity ratio (measured at market value) is one half. The company has $2.5 billion in face value of perpetual bonds which pay an annual coupon of 4% and have a yield to maturity of 10%. ABC's equity has a beta of 1.25. The company faces a 35% tax rate. The risk-free rate of return is 5.6% and the market risk premium, over and above the risk-free rate, is 8%. The company is considering a business expansion in the retail industry. The expansion project will generate $20 million free cash flow per year indefinitely. ABC is planning to maintain the industry average leverage ratio for the expansion project. Companies that operate purely in the manufacturing industry have an average beta of 0.8 and an average debt-equity ratio (measured at market value) of three quarter. Companies that operate purely in the retail industry have an average…arrow_forwardAshely Corporation has 80 million outstanding equity shares and the following projected financial information for the next four years. The tax rate is 25%. Ashely’s cost of capital is 13%. Assume Ashely is fully financed with equity. Year 1 2 3 4 Earnings Forecast ($millions) 1 Sales 474.28 520.31 571.88 728.99 2 Cost of Goods Sold 269.53 308.19 335.68 490.25 3 Selling, General & Admin. 102.05 108.25 105.24 135.76 4 Depreciation 12.00 15.00 12.50 15.50 5 Net Income 68.03 66.65 88.85 65.61 Capital Requirements ($millions) 6 Capital Expenditures 8.80 11.50 10.60 12.50 7 Increase in Net Working Capital 6.80 7.20 8.25 9.15 Ashely’s CFO wants to use P/E ratio to value the stock’s terminal value in year 4. The CFO forecasts the industry P/E ratio in year 4 is 20. Based on the forecasted P/E ratio, what is the…arrow_forwardA1. Payout policy (Answer all parts of this question.) (a) , What is the main theorem of Modigliani and Miller regarding the payout policy of firms? Explain. 1 (b) List four assumptions that must hold for the Modigliani-Miller theorem to be valid. (c) Consider a company that has 100 million shares outstanding. The market value of the company is currently at GBP 5 billion. Last year, the company paid out an annual dividend of GBP 2 per share. This year, the company intends to double the dividend to shareholders, but since the company has not enough cash, the company intends to raise the additional money required to pay the dividend in rights issue. i. ( If the price of a new share offered is GBP 25, what is the fair value of a right to buy a new share? Hint: The company first pays the dividends, and then raises the capital. ii. ( ) Contrary to theory, however, as soon as the company announces the rights issue, the share price drops. Why? Think of a reason why this transaction, i.e.,…arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
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