Problem 14-28 Flotation Costs and NPV [LO3, 4]Landman Corporation (LC) manufactures time series photographic equipment. It iscurrently at its target debt-equity ratio of 65. It's considering building a new $74 millionmanufacturing facility. This new plant is expected to generate aftertax cash flows of $8.9million in perpetuity. The company raises all equity from outside financing. There arethree financing options:1. A new issue of common stock: The flotation costs of the new common stock would be6.5 percent of the amount raised. The required return on the company's new equity is14 percent.2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 2.8percent of the proceeds. If the company issues these new bonds at an annual couponrate of 7 percent, they will sell at par.3. Increased use of accounts payable financing: Because this financing is part of thecompany's ongoing daily business, it has no flotation costs, and the company assignsit a cost that is the same as the overall firm WACC. Management has a target ratio ofaccounts payable to long-term debt of .15. (Assume there is no difference between thepretax and aftertax accounts payable cost.)What is the NPV of the new plant? Assume the company has a 22 percent tax rate. (Donot round intermediate calculations and enter your answer in dollars, not millions,rounded to the nearest whole number, e.g., 1,234,567.)NPV$19,100,619

Net present value (NPV):Net Present Value (NPV) is a financial metric that calculates the…

Answered: Landman Corporation (LC) manufactures…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter11: The Cost Of Capital

Section: Chapter Questions

Problem 20PROB

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Problem 14-30 Flotation Costs and NPV (LO4, 7) Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt-equity ratio of 0.76. It’s considering building a new $38 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $8.0 million in perpetuity. The company raises all equity from outside financing. There are three financing options: A new issue of common stock: The flotation costs of the new common stock would be 10% of the amount raised. The required return on the company’s new equity is 14%. A new issue of 20-year bonds: The flotation costs of the new bonds would be 4% of the proceeds. If the company issues these new bonds at an annual coupon rate of 8.0%, they will sell at par. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC.…
4 Book Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume that the discount rate for Nagano Golf is 16 percent Project A Nagano NP-30. Professional clubs that will take an initial investment of $971,000 at time 0. Next five years (years 1-5) of sales will generate a consistent cash flow of $440,000 per year. Introduction of new product at year 6 will terminate further cash flows from this project Project B Nagano NX-20 High-end amateur clubs that will take an initial investment of $700,000 at time 0. Cash flow at year 1 is $290,000. In each subsequent year, cash flow will grow at 10 percent per year. Introduction of new product at year 6 will terminate further cash flows from this project. Year e 1 2 3 4 NP-30 -$971,000 440,000 440,000 440,000 440,000 440,000 NX-20 -$700,000 290,000 319,000 350,900 Net present value Internal rate of return 385,990 424,589 Complete the following table: (Do not round intermediate calculations. Round the…
Exercise 14-14 (Algo) Comparison of Projects Using Net Present Value [LO14-2] Labeau Products, Limited, of Perth, Australia, has $21,000 to invest in one of the following two projects: Project Y $ 21,000 Investment required Annual cash inflows Single cash inflow at the end of 6 years Life of the project The company's discount rate is 18%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. Compute the net present value of Project X. 2. Compute the net present value of Project Y. 3. Which project should the company accept? Project X Required 1 Required 2 Required 3 $ 21,000 $ 8,000 Complete this question by entering your answers in the tabs below. $ 50,000 6 years
Problem 12-14 (Algo) Net present value method [LO12-4] Aerospace Dynamics will invest $115,000 in a project that will produce the following cash flows. The cost of capital is 11 percent. (Note that the fourth year's cash flow is negative.) Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Year 1 12345 Cash Flow $ 38,000 46,000 40,000 (46,000) 85,000 a. What is the net present value of the project? Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places. Net present value b. Should the project be undertaken? yes ○ no
Problem 12-13 (Algo) Internal rate of return [LO12-4] Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $70,000. The annual cash inflows for the next three years will be: Year 1 2 3 Cash Flow $ 35,000 33,000 28,000 Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the financial calculator method. a. Determine the internal rate of return. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Internal rate of return % b. With a cost of capital of 18 percent, should the equipment be purchased? Yes No
Problem 12-14 (Algo) Net present value method [LO12-4] Aerospace Dynamics will invest $150,000 in a project that will produce the following cash flows. The cost of capital is 11 percent. (Note that the fourth year's cash flow is negative.) Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Year 1 2 3 4 5 Cash Flow $49,000 60,000 52,000 (60,000) 110,000 a. What is the net present value of the project? Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places. > Answer is complete but not entirely correct. Net present value $ 40,996.33 X b. Should the project be undertaken? Ⓒyes no
Problem 9-33 Working Capital (LO4) Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.3 million. The equipment will be depreciated straight-line over 6 years, but, in fact, it can be sold after 6 years for $519,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year's forecast sales. The firm estimates production costs equal to $1.20 per trap and believes that the traps can be sold for $5 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 40%, and the required rate of return on the project is 10%. Year: Sales (millions of traps) 0 1 2 0 0.5 0.6 3 0.7 4 5 0.7 0.5 6 0.2 Thereafter 0 Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV? Note: Do not…
17. Problem 11.20 (NPV) eBook A project has annual cash flows of $6,000 for the next 10 years and then $10,500 each year for the following 10 years. The IRR of this 20-year project is 11.42%. If the firm's WACC is 8%, what is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent. $
Problem 9-33 Working Capital (LO4) Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.6 million. The equipment will be depreciated straight-line over 6 years, but, in fact, it can be sold after 6 years for $643,000. The firm believes that working capital at each date must be maintained at a level of 15% of next year's forecast sales. The firm estimates production costs equal to $1.90 per trap and believes that the traps can be sold for $6 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 40%, and the required rate of return on the project is 12%. Year: Sales (millions of traps) 0 0 Increase in NPV 1 0.4 million 2 0.5 3 0.7 4 0.7 5 0.5 6 0.3 Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV? Note:…
Exercise 12-15 (Algo) Internal Rate of Return and Net Present Value [LO12-2, LO12-3] Henrie's Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $151,410, including freight and installation. Henrie's estimated the new machine would increase the company's cash inflows, net of expenses, by $42,000 per year. The machine would have a five-year useful life and no salvage value. Click here to view Exhibit 128-1 and Exhibit 128-2, to determine the appropriate discount factor(s) using table. Required: 1. What is the machine's internal rate of return? (Round your answer to the nearest whole percentage, i.e. 0.123 should be considered as 12%.) 2. Using a discount rate of 12%, what is the machine's net present value? Interpret your results. 3. Suppose the new machine would increase the company's annual cash inflows, net of expenses, by only $36,930 per year. Under these conditions, what is the internal rate of return? (Round…
15 the a Coastal Carolina Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar beating system. To meet this demand, management plans to expand production capacity by 25% with $ 15 million investment in plant and machinery The firm wants to maintain a 55% debt level in its capital structure. It also wants to maintain its past dividend policy of distributing 50% of last year's net income. Ia 2021, net income was $5 million. How much external St equity must Coastal Carolina seek at the beginning of 2072 to expand "Heas desired? Assume that the firm uses only debt and common equity in its capital structure. Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent. 2m 98mvexolult.com $ 355 CONVE all of 293 25568 dal 29 21 shots A 4505 Sallo 600 ll 6 (
Problem 11-2 (Algo) Cost of capital [LO11-2] Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 5 percent return and can be financed at 2 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 13 percent return but would cost 15 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm's capital structure. a. Compute the weighted average cost of capital. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Weighted average cost of capital b. Which project(s) should be accepted? O New machine. O Piece of equipment. %

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