Blue Cod, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .35, but the industry target debt-equity ratio is .30. The industry average beta is 1.50. The market risk premium is 8 percent, and the risk-free rate is 6 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corpora tax rate is 40 percent. The project requires an initial outlay of $690,000 and is expected to result in an after-tax EBIT of $110,000 at the end of the first year. The project will be financed at the company's target debt-equity ratio. Annual cash flows from the project will grow at a constant rate of 7 percent until the end of the fifth year and remain constant forever thereafter. What is the NPV of this project? (Keep at least 3 decimal places in intermediate steps. Choose an answer that is closest to yours) O $263,770.1 O $211,264.8 O $291,028.5 O $237,186.1

Blue Cod, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .35, but the industry target debt-equity ratio is .30. The industry average beta is 1.50. The market risk premium is 8 percent, and the risk-free rate is 6 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corpora tax rate is 40 percent. The project requires an initial outlay of $690,000 and is expected to result in an after-tax EBIT of $110,000 at the end of the first year. The project will be financed at the company's target debt-equity ratio. Annual cash flows from the project will grow at a constant rate of 7 percent until the end of the fifth year and remain constant forever thereafter. What is the NPV of this project? (Keep at least 3 decimal places in intermediate steps. Choose an answer that is closest to yours) O $263,770.1 O $211,264.8 O $291,028.5 O $237,186.1

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .45, but the industry target debt- equity ratio is .50. The industry average beta is 1.10. The market risk premium is 6.9 percent and the risk-free rate is 4.5 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 23 percent. The project requires an initial outlay of $825,000 and is expected to result in a $101,000 cash inflow at the end of the first year. The project will be financed at the company's target debt-equity ratio. Annual cash flows from the project will grow at a constant rate of 5 percent until the end of the fifth year and remain constant forever thereafter. Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV
Seattle Health Plans currently uses zero-debt financing. Its operating profit is $1 million, and it pays taxes at a 40 percent rate. It has $5 million in assets and, because it is all-equity financed, $5 million in equity. Suppose the firm is considering replacing half of its equity financing with debt financing that bears an interest rate of 8 percent. What impact would the new capital structure have on the firm’s profit, total dollar return to investors, and return on equity? Redo the analysis, but now assume that the debt financing would cost 15 percent. Repeat the analysis required for part a, but now assume that Seattle Health Plans is a not-for-profit corporation and hence pays no taxes. Compare the results with those obtained in part a
Hallmark, the greeting card company, is considering going online. It is anticipated that it will cost the firm RM 1 billion to do so and that the firm will be able to use its current debt capacity to borrow 20% of this investment, at an after-tax cost of 4.5%. Hallmark has a beta of 1.1. Online retailers have a beta of 1.50 and do not carry debt. If the riskless rate is 6% and the market risk premium is 5.5% estimate the cost of capital for the online investment.
Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .45, but the industry target debt-equity ratio is .40. The industry average beta is 1.05. The market risk premium is 6.5 percent and the risk-free rate is 4.1 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 24 percent. The project requires an initial outlay of $805,000 and is expected to result in a $97,000 cash inflow at the end of the first year. The project will be financed at the company’s target debt-equity ratio. Annual cash flows from the project will grow at a constant rate of 4 percent until the end of the fifth year and remain constant forever thereafter. Calculate the NPV of the project.
Suppose that Seattle Health Plans use zero-debt financing. It's operating profit is $1 million, and it pays taxes at a 40 percent rate. It has $5 million in assets and, because it is all equity financed, $5 million equity. The firm's profit, total dollar return to investors, and return on equity under these conditions are listed below. Suppose that the firm is considering replacing half of its equity financing with debt financing that bears an interest rate of 8 percent A) What impact would the new capital structure have on the firm's profit, total dollar return to investors, and return on equity? B) Redo the analysis, but now assume that the debt financing would cost 15 percent. C) Repeat the analysis required for question A, but now assume that Seattle Health Plans is a not-for-profit corporation and hence pays no taxes. Balance Sheets Total Assets $5,000,000 Debt $0 Common stock (=equity) $5,000,000 Total liabilities & equity $5,000,000 Income…
Hw.16. Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt–equity ratio of .45, but the industry target debt–equity ratio is .40. The industry average beta is 1.30. The market risk premium is 8 percent, and the risk-free rate is 6 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 35 percent. The project requires an initial outlay of $676,000 and is expected to result in a $96,000 cash inflow at the end of the first year. The project will be financed at the company’s target debt–equity ratio. Annual cash flows from the project will grow at a constant rate of 6 percent until the end of the fifth year and remain constant forever thereafter. Calculate the NPV of the project.
Give typing answer with explanation and conclusion SeattleHealth Plans currently uses zero-debt financing. Its operating profit is $1 million, and it pays taxes at a 23 percent rate. It has $8 million in assets and, because it is all-equity financed, $8 million in equity. Suppose the firm is considering replacing 22 percent of its equity financing with debt financing that bears an interest rate of 5 percent. What impact would the new capital structure have on the firm's profit?
Axon Industries needs to raise $22.41M for a new investment project. If the firm issues one-year debt, it may haveto pay an interest rate of 9.44 %, although Axon's managers believe that 5.51 % would be a fair rate given the level of risk. If the firm issues equity, they believe the equity may be underpriced by 11.26 %. What is the cost to current shareholders of financing the project out of Equity? NOTE: Provide your answers in Millions. E.G. for 100M you must enter 100.0000, for 20M you must enter 20.0000, etc.
LuLu In. wants to utilize a different debt-equity ratio than it had previously. It is planning to increase the firm’s current debt-equity ratio of 0.4 to a higher value of 0.8 by issuing debt to repurchase a portion of its common stock. LuLu In. currently has $12 million worth of debt outstanding and faces a pretax cost of debt of 8 percent per year. The firm expects to have an EBIT of $3.6 million per year in perpetuity and pays no taxes. Use the Modigliani and Miller propositions to determine the expected rate of return on the firm’s equity after the issue is announced.
Lucky cement Co. is trying to establish its optimal capital structure. Its current capital structure consists of 30% debt and 70% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, Rf, is 5%; the market risk premium, RPM, is 6%; and the firm’s tax rate is 40%. Currently, Lucky’s cost of equity is 14%, which is determined by the CAPM.1. What would be Lucky’s estimated cost of equity if it changed its capital structure to 40% debt and 60% equity?2. What would be Lucky’s estimated cost of equity if it changed its capital structure to 50% debt and 50% equity?3. Based on cost of equity estimations, should the firm change its capital structure? if yes, which point is optimal if the target is to minimize the cost of equity of the firm?
(Use the following information for the next three questions). Consider a world with taxes but no other market imperfections. BLT machinery has a debt to equity ratio of 2/3. Its cost of equity is 20%, cost of debt is 4%, and tax rate is 35%. Assume that the risk-free rate is 4%, and market risk premium is 8%. Suppose the firm repurchases stock and finances the repurchase with debt, causing its debt to equity ratio to change to 3/2. What is the firm's new cost of equity? None of the choices New cost of equity is 26.05% New cost of equity is 23.59% New cost of equity is 16.32% New cost of equity is 28.00%
Tropical Tours is considering an expansion of its operations, which will require the company to issue new debt and equity. Tropical’s investment banker provided the following information about the cost of issuing new debt: If Tropical’s capital structure consists of 60 percent debt, what WACC break points are associated with issuing new debt? Kindly answer with explanation.

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