OfficeeBookEmpire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of ra = 9% as long as it finances at its target capital structure, which calls for50% debt and 50% common equity. Its last dividend (Do) was $3.30, its expected constant growth rate is 6%, and its common stock sells for $27. EEC's tax rate is 40%. Two projects are available:Project A has a rate of return of 13%, and Project B's return is 12%. These two projects are equally risky and about as risky as the firm's existing assets.a. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.%b. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places.c. Which projects should Empire accept?|-Select-

For calculation of cost of equity, we need to use this equation Cost of equity =D0(1+g)P0+g Where D0…

Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of ra = 9% as long as it finances at its target capital structure, which ca 50% debt and 50% common equity. Its last dividend (Do) was $3.30, its expected constant growth rate is 6%, and its common stock sells for $27. EEC's tax rate is 40%. Two projects are avail Project A has a rate of return of 13%, and Project B's return is 12%. These two projects are equally risky and about as risky as the firm's existing assets. a. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % b. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. c. Which projects should Empire accept? -Select

Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of ra = 9% as long as it finances at its target capital structure, which ca 50% debt and 50% common equity. Its last dividend (Do) was $3.30, its expected constant growth rate is 6%, and its common stock sells for $27. EEC's tax rate is 40%. Two projects are avail Project A has a rate of return of 13%, and Project B's return is 12%. These two projects are equally risky and about as risky as the firm's existing assets. a. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % b. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. c. Which projects should Empire accept? -Select

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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3
Suppose there are two alternatives to finance a power generation project planned by ABC (Pvt.) Ltd. Alternative A is to financing the total capital of Rs. 450 Mn with equity and Alternative B is to employ Rs.150 Mn equity, Rs. 100 Mn by 14% debentures and the rest by a 15% bank loan. The corporate tax rate is 30% and the owners expects 18% dividend in both alternatives. Earnings before interest and tax (EBIT) for the project is estimated as Rs.250 Mn. a. Calculate weighted average cost of capital (WACC) for both alternatives.
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend (D0) was $3.45, its expected constant growth rate is 3%, and its common stock sells for $30. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 14%, and Project B's return is 9%. These two projects are equally risky and about as risky as the firm's existing assets. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. % Which projects should Empire accept? -Select-Project A? Project B?
Meyer & Co. expects its EBIT to be $78,000 every year forever. The firm can borrow at 7 percent. Meyer currently has no debt, and its cost of equity is 12 percent. If the tax rate is 35 percent, what is the value of the firm? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Value of the firm $ 650,000.00|8 What will the value be if the company borrows $103,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Value of the firm $ 720,887.25
answer quickly, Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm canborrow at 11 percent. Bruce currently has no debt, and its cost of equity is18 percent. The tax rate is 31 percent.Given the above information;a) Complete the table given below for varying levels of debt below by usinga mix of the given information and using your own computations.EBIT $100,000Cost of debt 11%Cost of equity when unlevered 18%Tax rate 31%Debt $0 $10,000 $20,000 $30,000Cost of Equity when leveredEquityD/EVuVLWACCb) Plot the results from the table into the following two graphs:i) Value of the firm vis-à-vis- Total debtii) Cost of capital of the firm vis-à-vis D/E ratio.iii) Which MM propositions have you demonstrated?
A project costs $379 at t = 0 and generates unlevered after - tax cash flows of $50 per year forever. The project's unlevered cost of capital is 10.5%. The initial cost of the project is paid for with a combination of debt and equity. Debt contributes $77 and will earn interest at 2.0% forever. (The debt is perpetual, it never matures. Assume the debt tax shield cash flows have the same risk profile as the debt cash flows. The debt is fairly priced. All of the project NPV accrues to the equity holders.) The tax rate is 17%. What is the levered NPV of the project? (Calculate using the APV method.) Give your answer in dollars to the nearest $0.1
ABC collmpany uses only debt equity. It can borrow unlimited at an interest rate of 10% as long as it finances At its target capital structure, which calls for 50% debt and 50% equity. Its last dividend was $1.46, it's expected constant growth rate is 8% and it's stock still sells for $24. ABC companies tax rate is 21%. Four projects are available project A cost $250 million in return = 13% project B cost 125 milion return = 12% project C cost $200 million and return = 11% project D cost $150 million and return = 10%. 1a) what is ABC Companys cost of common stock? 1b) What is ABC Company's WACC? 1c) What should be the optimal budget?
A firm has target debt-equity ratio of 0.60. The flotation cost for equity is 5% and the flotation cost for debt is 3%. The firm needs $10,000,000 investment to undertake a project. How much should the firm raise to account for flotation costs and the initial investment need of the project? O $10,395,010 O $10,416,667 $11,000,821 $10,572,912 O $10,443,864
ASAP!! IN 20 minns Karachi Electric Supply Company (KESC) uses only debt and equity. It can borrow unlimited amounts at an interest rate of 11 percent as long as it finances at its target capital structure, which calls for 45 percent debt and 55 percent common equity. Its last dividend was Rs 12, its expected constant growth rate is 4 percent, and its stock sells at a price of Rs. 50. KESC’s tax rate is 40 percent. Two projects are available: Project A has a rate of return of 13 percent, while Project B has a rate of return of 10 percent. All of the company’s potential projects are equally risky and as risky as the firm’s other assets. What is KESC’s cost of common equity? What is KESC’s WACC? c. Which projects should KESC’s select? and why?
Baghiben
Hunter Corporation expects an EBIT of $30,000 every year forever. The company currently has no debt and its cost of equity is 14 percent. The tax rate is 20 percent. The company is able to borrow at 8 percent. What will the value of the company be if it takes on debt equal to 60 percent of its levered value? [Note: the proceeds from issuing new debt are used to repurchase Hunter's equity.] O $251,488.1 $194,805.2 O $274,285.8 O $171,428.6
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 40% debt and 60% common equity. Its last dividend (Do) was $2.60, its expected constant growth rate is 4%, and its common stock sells for $30. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 11%, and Project B's return is 10%. These two projects are equally risky and about as risky as the firm's existing assets. a. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % b. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. -Select- % c. Which projects should Empire accept?

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