Farmers Alliance Limited is considering investing in new equipment with the initial cost of project/investment to be $100,000. This project is expected to generate EBIT of $15,000 per year forever (perpetuity). This project or investment can be financed either with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt
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Farmers Alliance Limited is considering investing in new equipment with the initial cost
of project/investment to be $100,000. This project is expected to generate EBIT of
$15,000 per year forever (perpetuity). This project or investment can be financed either
with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt
and $60,000 equity. The shareholders required return on an all equity financed project in
this risk class is 10%. The firm's marginal tax rate is 40%. The cost of any debt is 5%
before taxes. Note that in the world of Modigliani & Miller, all cash flows are perpetual
and debt does not mature.
Required:
(ii) What is the adjusted net worth of the project?
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- Jasmine Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 through 10. What is the payback period for this project?Farmers Alliance Limited is considering investing in new equipment with the initial cost of project/investment to be $100,000. This project is expected to generate EBIT of $15,000 per year forever (perpetuity). This project or investment can be financed either with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt and $60,000 equity. The shareholders required return on an all equity financed project in this risk class is 10%. The firm's marginal tax rate is 40%. The cost of any debt is 5% before taxes. Note that in the world of Modigliani & Miller, all cash flows are perpetual and debt does not mature.Required: (iii) Use the weighted average cost of capital method to value the project. What is the value of equity? What is the value of debt?Farmers Alliance Limited is considering investing in new equipment with the initial cost of project/investment to be $100,000. This project is expected to generate EBIT of $15,000 per year forever (perpetuity). This project or investment can be financed either with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt and $60,000 equity. The shareholders required return on an all equity financed project in this risk class is 10%. The firm's marginal tax rate is 40%. The cost of any debt is 5% before taxes. Note that in the world of Modigliani & Miller, all cash flows are perpetual and debt does not mature. Required: (i) if the project is financed entirely by equity, how much would be its net worth? ii) what is the adjusted net worth of the project iii) Use the weighted average cost of capital method to value the project
- Farmers Alliance Limited is considering investing in new equipment with the initial cost of project/investment to be $100,000. This project is expected to generate EBIT of $15,000 per year forever (perpetuity). This project or investment can be financed either with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt and $60,000 equity. The shareholders required return on an all equity financed project in this risk class is 10%. The firm's marginal tax rate is 40%. The cost of any debt is 5% before taxes. Note that in the world of Modigliani & Miller, all cash flows are perpetual and debt does not mature.Required 1. Compare and contrast the strengths and weaknesses of the adjusted present value, weighted average cost of capital, and flow to equity approaches to investment appraisal. Which method, in your opinion, is the best? Explain.Farmers Alliance Limited is considering investing in new equipment with the initial cost of project/investment to be $100,000. This project is expected to generate EBIT of $15,000 per year forever (perpetuity). This project or investment can be financed either with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt and $60,000 equity. The shareholders required return on an all equity financed project in this risk class is 10%. The firm's marginal tax rate is 40%. The cost of any debt is 5% before taxes. Note that in the world of Modigliani & Miller, all cash flows are perpetual and debt does not mature.Required: (i) Use the flow to equity method to calculate the value of the project’s net worth to equity holders.Farmers Alliance Limited is considering investing in new equipment with the initial cost of project/investment to be $100,000. This project is expected to generate EBIT of $15,000 per year forever (perpetuity). This project or investment can be financed either with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt and $60,000 equity. The shareholders required return on an all equity financed project in this risk class is 10%. The firm's marginal tax rate is 40%. The cost of any debt is 5% before taxes. Note that in the world of Modigliani & Miller, all cash flows are perpetual and debt does not mature.Required: 1. If the project is financed entirely by equity, how much would be its net worth?
- OmegaTech is considering project A. The project would require an initial investment of $58,500.00, and then have an expected cash flow of $72,800.00 in 4 years. Project A has an internal rate of return of 9.57 percent. The weighted-average cost of capital for OmegaTech is 6.69 percent. The risk of the project is similar to the average risk of the company. Which one of the following assertions is true? The NPV that Omega Tech would compute for project A is less than or equal to -$11.24. The NPV that Omega Tech would compute for project A is greater than -$11.24 but less than $0.00. The NPV that Omega Tech would compute for project A can not be computed from the information provided The NPV that Omega Tech would compute for project A is equal to greater than $0.00.OmegaTech is considering project A. The project would require an initial investment of $52,100.00, and then have an expected cash flow of $77,900.00 in 4 years. Project A has an internal rate of return of 9.31 percent. The weighted-average cost of capital for OmegaTech is 6.99 percent. The risk of the project is similar to the average risk of the company. Which one of the following assertions is true? The NPV that Omega Tech would compute for project A is less than or equal to -$11.16. The NPV that Omega Tech would compute for project A can not be computed from the information provided The NPV that Omega Tech would compute for project A is equal to greater than $0.00. The NPV that OmegaTech would compute for project A is greater than -$11.16 but less than $0.00.1. A company is considering investing in a project. The future perpetual cash flow is either $750K if the market goes up or $125K if the market goes down next year. The objective probability the market will go up is 20%. The appropriate risk-adjusted rate of return (cost of capital) is 25%. The initial capital investment required at time 0 is $1200K. а. Should the company invest in this project? b. Upon closer inspection the CFO realizes the company actually has some flexibility in managing this project. Specifically, if the market goes down, the company can abandon the project, and liquidate its original capital investment for 75% of its original value. If, however, the market should go up, the company could expand operations, which would result in twice the original PV of the cash flows. To expand the company will have to make an additional capital expenditure of $800K. The CFO wants to know if the company should now proceed with the project with the added flexibilities, and asks…
- I am considering a project with free cash flows in one year of €200,000 or €250,000 with equal probability. The cost of the project is $180,000. The project’s cost of capital is 12% and the risk-free rate is 4%. What is the NPV of the project? If the project is financed by all equity, what is the initial market value of the unlevered equity? If the project is financed with 50% debt (at the risk-free rate), what is the expected return on the levered equity?Mantap Industries has three projects under consideration. Project L is a lower-than-averagerisk project, project A is an average-risk project, and project H is a higher-than-average-riskproject. You have gathered the following information to determine if one or more of theseprojects has an acceptable rate of return for the firm.• Sources of financing 50% debt and 50% equity• Rd = 8.00% before taxes• Tax Rate = 30%• Average beta for Mantap Industries = 1.0• Rm = 13.00%• Rf = 4.00%• Adjusted WACC = 9.30%• Beta for project L = 0.80, for project A = 1.00, and for project H = 1.20• IRRL = 9.00%, IRRA = 10.00%, and IRRH = 11.00%Calculate the required rate of return for each project and determine which, if any, projects are acceptable to the firmConsider an entrepreneur who plans to invest in a project that requires an initial investment of $1,800 this year. The project will generate either $1,600 or $4,200 next year. The cash flows of the project depend on whether the economy is weak or strong. Both scenarios are equally likely. The risk-free rate is 4% and the risk premium of the project is 12%. Assume perfect capital markets. Now assume that the entrepreneur will borrow $400 at 5% interest rate to finance the project. The cost of equity of the project is closest to: 16.60% 17.72% 18.29% 19.43% None of the above