magine a world with perfect certainty, no costs of financial distress and where the corporate tax rate is 20%. Epsilon LTD has annual earnings before interest and taxes (EBIT) of €1,000. Interest rates on its debt are 5% and will be so forever. How much debt and equity (in €) should it have if it wanted to achieve its optimal capital structure?

magine a world with perfect certainty, no costs of financial distress and where the corporate tax rate is 20%. Epsilon LTD has annual earnings before interest and taxes (EBIT) of €1,000. Interest rates on its debt are 5% and will be so forever. How much debt and equity (in €) should it have if it wanted to achieve its optimal capital structure?

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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A firm wants to fund a $7 million project by raising both short-term and long-term debt. Because short-term debt is less risky, its cost is 5%. The long-term debt (bond) must pay 5.5% annual coupons. If the firm raises $5 million in short-term debt and the remainder in long-term debt, what is this project's WACC? Assume the tax rate = 26%. a. 5.14% b. 3.81% c. 3.89% d. 5.25% e. 1.34%
You are considering a geographic expansion into the European market for Canopy Pharmaceuticals. Below are the incremental cash flows for the Canopy project for you to use in your analysis. Assume Canopy's marginal tax rate is 35%, their cost of capital is 15.7 % and an expected growth rate of 5% after 2003. 1998 1999 2000 2001 2002 2003 Net Sales 8,500 15,000 35,500 46,000 52,000 60,000 Cost of Sales 3,100 5,500 13,900 18,000 20,000 24,000 Depreciation 100 100 100 100 100 100 SG&A 3,500 5,410 6,400 5,300 7,200 7,800 R&D 1,100 2,800 4,100 5,400 6,500 7,000 EBIT 700 1,190 11,000 17,200 18,200 21,100 Taxes (35%) 245 417 3,850 6,020 6,370 7,385 Net Income 455 774 7,150 11,180 11,830 13,715 Depreciation 100 100 100 100 100 100 Operating Cash Flows 555 874 7,250 11,280 11,930 13,815 CAPEX (906)…
Assume perfect capital markets. A firm has a market value of $30, 000 and debt of $7, 500 horrowed at 7%. The return on equity is 18%. What is the return on equity if the firm was unlevered? (Hint: Think about WACC, WACCL = WACCU)
Hello This is for the next part, can you help with question 3. First picture is question, the second picture shows the solution that i cant figure out
) Suppose a company’s current free cash flow (i.e. FCF0) is $100 million and is expected to grow at a constant rate of 5 percent. If the company’s overall cost of capital is 15 percent, what is the current value of operations? $ 913 million $1,000 million $1,050 million $1,500 million $2,000 million
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Carambola de Honduras. Slinger Wayne, a U.S.-based private equity firm, is trying to determine what it should pay for a tool manufacturing firm in Honduras named Carambola. Slinger Wayne estimates that Carambola will generate a free cash flow of 12 million Honduran lempiras (Lp) next year, and that this free cash flow will continue to grow at a constant rate of 7.0% per annum indefinitely. A private equity firm like Slinger Wayne, however, is not interested in owning a company for long, and plans to sell Carambola at the end of three years for approximately 10 times Carambola's free cash flow in that year. The current spot exchange rate is Lp15.8194/$, but the Honduran inflation rate is expected to remain at a relatively high rate of 15.0% per annum compared to the U.S. dollar inflation rate of only 2.5% per annum. Slinger Wayne expects to earn at least a 21% annual rate of return on international investments like Carambola. a. What is Carambola worth if the Honduran lempira were to…
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Suppose MMC Industries has calculated its external funds needed (EFN) to be $23,000,000, but now management is considering raising the previously assumed dividend payout ratio from 35% to 40%. If the payout ratio is increased, what will happen to EFN?
H2.
9
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