Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Company X is considering an expansion. The project has an estimated
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- Air Tampa has just been incorporated, and its board of directors is grappling with the question of optimal capital structure. The company plans to offer commuter air services between Tampa and smaller surrounding cities. Air Tampa believes it would have the same business risk as Jaxair, which is an airline that has been around for a few years and that has had zero growth. Jaxair's market-determined beta is 1.8, and it has a current market value debt ratio (total debt to total assets) of 40% and a federal-plus-state tax rate of 25%. Air Tampa expects to have investment tax credits when it begins business, which reduces its federal-plus-state tax rate to 20%. Air Tampa's owners expect that the total book and market value of the firm's stock, if it uses zero debt, would be $16 million. Air Tampa's CFO believes that the MM and Hamada formulas for the value of a levered firm and the levered firm's cost of capital should be used because zero growth is expected. a. Estimate the beta of an…arrow_forwardAmcor Ltd is a paper packaging company that currently has a beta of 0.49,debt with a market value of $11.5 million and equity with a market value of $5.7 billion.Amcor is considering expanding into the manufacture of personal protective equipment,a project that is of similar risk to the activities of Ansell Ltd.Ansell's beta is 0.91,and it has debt of with a market value of $1.4 billion and equity with a market value of $2 million. The current cost debt for Amcor is 5% p.a. compounding semi-annually,the current yield on government bonds is 2% p.a. and the equity market risk premium is estimated to be 6% p.a. compounded annually.The tax rate is 30%. a.Calculate Amcor's cost of equity for this project. b.Calculate Amcor's WACC for the project.arrow_forwardA firm has two independent projects, each requiring investment of INR 3 million, but each of these have different risk profiles, i.e., different costs of capital as below: Project A 17%, Project B 7% IRRs for A and B are 20% and 9% respectively. The firm would maintain a 30:70 debt-equity ratio and expects its net income to be 6 million INR. If this firms maintains a residual dividend policy (all cash distributed as dividends), what will be the pay-out ratio for this firm?arrow_forward
- Do not provide solution in imge format. and also do not provide plagarised content otherwise i dislike. Consider a firm with an EBIT of $865,000. The firm finances its assets with $2,650,000 debt (costing 7.9 percent and is all tax deductible) and 550,000 shares of stock selling at $6.00 per share. To reduce the firm's risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 350,000 shares of stock. The firm's tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $865,000. Calculate the change in the firm's EPS from this change in capital structure. Note: Do not round intermediate calculations and round your final answers to 2 decimal places. EPS before EPS after Differencearrow_forwardYou are an analyst at Apex Innovations, known for its cutting-edge technology in the renewable energy sector. Apex is considering moving into high-energy batteries. You have been assigned to determine the leverage beta for this new division. Apex, plans to maintain a target debt-to-equity ratio of 1.88. We comparing other companies in the high-energy battery sector, you learned the average beta is 0.83 and the industry's average debt-to-equity ratio is 1.56. The tax rate for Apex and the high energy battery sector is 25%. What is the industry's unleverage beta? What is the new division's leverage beta?arrow_forwardNorth Star is trying to determine its optimal capital structure, which now consists of only common equity. The firm will add debt to its capital structure if it minimizes its WACC, but the firm has no plans to use preferred stock in its capital structure. In addition, the firm’s size will remain the same, so funds obtained from debt issued will be used to repurchase stock. The percentage of shares repurchased will be equal to the percentage of debt added to the firm’s capital structure. (In other words, if the firm’s debt-to-capital ratio increases from 0 to 25%, then 25% of the shares outstanding will be repurchased.) North Star is a small firm with average sales of $25 million or less during the past 3 years, so it is exempt from the interest deduction limitation. Its treasury staff has consulted with investment bankers. On the basis of those discussions, the staff has created the following table showing the firm’s debt cost at different debt levels: Debt-to-Capital Ratio (Wd)…arrow_forward
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