Mary, Inc. is considering a project for next year, which will cost $5 million. Mary plans to use the following combination of d equity to finance the investment. Issue $1.5 million of 10-year bonds at a price of 101, with a coupon/contract rate of 4%, a flotation costs of 2% of par. Use $3.5 million of funds generated from retained earnings. The equity market is expected to earn 8%. U.S. Treasury bonds are currently yielding 3%. The beta coefficient for Mary, Ind estimated to be .70. Mary is subject to an effective corporate income tax rate of 30 percent. Compute Mary's expected rate of return using the Capital Asset Pricing Model (CAPM). Please show calculations.
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- Digital Organics (DO) has the opportunity to invest $1.06 million now (t = 0) and expects after-tax returns of $660,000 in t = 1 and $760,000 in t= 2. The project will last for two years only. The appropriate cost of capital is 13% with all-equity financing, the borrowing rate is 9%, and DO will borrow $360,000 against the project. This debt must be repaid in two equal installments of $180,000 each. Assume debt tax shields have a net value of $0.40 per dollar of interest paid. Calculate the project's APV. (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations. Round your answer to the nearest whole number.) Adjusted present valueSlobe Telecom is considering a project for the coming year that will cost P50 million. Slobe plans to use the following combination of debt and equity to finance the the investment: a. Issue P15 million of 20-year bond at a price of 101, with a coupon rate of 8%, and floatation costs of 2% of par. b. Use P35 million of funds generated from earnings. The equity market is expected to earn 12%. US treasury bonds are currently yielding 5%. The beta coefficient of Slobe is estimated to be .60. Slobe is subject to to an effective tax rate of 40%. The before-tax cost of Slobe's planned debt financing , net of flotation costs, in the first year is ________. Assume the after-tax costs of debt is 7% and the cost of equity is 12%. The WACC must be _______. The company's expected rate of return under the CAPM must be ________.Eagle Sports Products (ESP) is considering issuing debt to raise funds to financeits growth during the next few years. The amount of the issue will be between$35 million and $40 million. ESP has already arranged for a local investmentbanker to handle the debt issue. The arrangement calls for ESP to pay flotationcosts equal to 4 percent of the total market value of the issue.a. Compute the flotation costs that ESP will have to pay if the market valueof the debt issue is $39 million.b. If the debt issue has a market value of $39 million, how much will ESP beable to use for its financing needs? That is, what will be the net proceedsfrom the issue for ESP? Assume that the only costs associated with the issueare those paid to the investment banker.c. If the company needs $39 million to finance its future growth, how muchdebt must ESP issue?
- A project requires an initial investment of $500,000. This project will generate a future cash flow of $100,000/year for 8 years. The WACC of the firm is 8%. The cost of equity of this firm is 12%. The cost of debt of this firm is 6%. The risk-free rate is 3%. The floatation cost of equity is 4%. The floatation cost of debt is 2%. The target debt-to-equity ratio is 0.5. What is the NPV of this project?igital Organics (DO) has the opportunity to invest $1.03 million now (t = 0) and expects after 2. The project will last for two years = - tax returns of $630,000 in t = 1 and $730,000 in t only. The appropriate cost of capital is 11% with all - equity financing, the borrowing rate is 7%, and DO will borrow $330,000 against the project. This debt must be repaid in two equal installments of $165,000 each. Assume debt tax shields have a net value of $0.20 per dollar of interest paid. Calculate the project's APV.Caribbean, Inc. is considering a new investment opportunity. The project requires an initial outlay of $525,000 and is expected to bring in a $75,000 cash inflow at the end of the first year. After the first year, annual cash flows from the project are forecasted to grow at a constant rate of 5% until the end of the fifth year and to remain constant forever thereafter. The company currently has a target debt-to-equity ratio of .40, but the industry that the company operates in has a debt-to-equity ratio of .25. The industry average beta is 1.2, the market risk premium is 7%, and the risk-free rate is 5%. Assume that all the companies in the industry can issue debt at the risk-free rate and the corporate tax rate is 40%. Assuming that the project will be financed at Caribbean’s target debt-to-equity ratio, should the company invest in the project?
- CrochetCo is considering an investment in a project which would require an initial outlay of $301,072 and produce expected cash flows in years 1 through 4 of $85,410 per year. You have determined that the current after-tax cost of the firm's capital (required rate of return) for each source of financing is as follows: Source of Capital Cost Long-Term Debt 4% Preferred Stock 8% Common Stock 13% Weight 45% 11% remaining What is the net present value of this project?A financial manager is considering two possible sources of funds necessary to finance a $10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative one is a short-term commercial bank loan with an interest rate of 8 percent for one year. The alternative is a five-year term loan with an interest rate of 10 percent. The firm's income tax rate is 30 percent. What will be the firm’s projected earnings under each alternative for the first year? The financial manager expects short-term rates to rise to 11 percent in the second year. At that time long-term rates will have risen to 12%. What will be the firm’s projected earnings under each alternative in the second year? What are the crucial considerations when selecting between short- and long-term sources of finance?A financial manager is considering two possible sources of funds necessary to finance a $10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative one is a short-term commercial bank loan with an interest rate of 8 percent for one year. The alternative is a five-year term loan with an interest rate of 10 percent. The firm's income tax rate is 30 percent. What will be the firm's projected earnings under each alternative for the first year?
- Afex Engineering Company has cost of equity of 17%, cost of debt of 12% and debt ratio of 40%. The company is considering an investment project in its existing line of business. The project will need a cash outlay of $120million. It is expected to generate annual EBDIT of $35million for 8 years. The project will require $3million each year for net working capital and capital expenditure. Afex will be able to borrow 50% of the project’s cost from a financial institution at a rate of 12% p.a., and the loan will be repaid in five equal instalments after 3 years. Corporate tax rate is 30%, and assuming straight-line depreciation for tax purposes, with zero terminal value of the project; i. Determine whether Afex should undertake the project. ii. Due to the company’s credit worthiness, suppose the management of Afex is able to negotiate for a lower interest rate from the financial institution of 10% p.a. What effect would this have on the firm’s NPV?Halifax Technologies primarily relies on 100% equity financing to fund projects. A good opportunity is available that will require $250,000 in capital. The Halifax owner can supply the money from personal investments that currently earn an average of 8.5% per year. The annual net cash flow from the project is estimated at $30,000 for the next 15 years. Alternatively, 60% of the required amount can be borrowed for 15 years at 9% per year. Using a before- tax analysis and setting the MARR equal to the WACC, determine which plan, if either, is better.Other relevant information about the company follows: The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent. Based on the statement is the photos attached and above, asnwer the following question Determine the initial outlay of the project. Calculate the annual after-tax operating cash flow for Years 1 -5.