Use the following information to answer the question(s) below. Nielson Motors has a debt-equity ratio of 1.8, an equity beta of 2, and a debt beta of 0.2. It is currently evaluating the following projects, none of which would change Nielson's volatility. 5 80 18 15 14 4 Project 1 2 3 Investment 100 75 120 60 NPV 23 12 (All amounts are in $millions.) Nielson Motors should accept those projects with profitability indices greater than (2 decimal places):

Use the following information to answer the question(s) below. Nielson Motors has a debt-equity ratio of 1.8, an equity beta of 2, and a debt beta of 0.2. It is currently evaluating the following projects, none of which would change Nielson's volatility. 5 80 18 15 14 4 Project 1 2 3 Investment 100 75 120 60 NPV 23 12 (All amounts are in $millions.) Nielson Motors should accept those projects with profitability indices greater than (2 decimal places):

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 6P

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B Use the following information to answer the question(s) below. Nielson Motors has a debt-equity ratio of 1.6, an equity beta of 1.6, and a debt beta of 0.5. It is currently evaluating the following projects, none of which would change Nielson's volatility. Project 1 Investment 100 NPV 23 4 5 2 3 75 120 60 80 12 18 15 14 (All amounts are in Smillions.) The total debt overhang associated with accepting project 1 is closest to ($ million) (2 decimal places):
Gnomes R Us is considering a new project. The company has a debt-equity ratio of .72. The company’s cost of equity is 14.7 percent, and the aftertax cost of debt is 8 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +2 percent. a. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What discount rate should the firm use for the project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Gnomes R Us is considering a new project. The company has a debt-equity ratio of .86. The company's cost of equity is 14.6 percent, and the aftertax cost of debt is 7.9 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +3 percent. a. What is the company's WACC? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What discount rate should the firm use for the project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. WACC b. Project discount rate %
Potter Inc. is trying to estimate its optimal capital structure. Right now, Potter Inc. has a capital structure that consists of 20 percent debt and 80 percent equity. The risk-free rate is 6 percent, and the market risk premium is 5 percent. Currently the company’s cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent.What is the new levered beta given the new capital structure? a1.67 b1.039 c1.409 d1.24 What would be Potter Inc.’s estimated cost of equity if it were to change its capital structure to 50 percent debt and 50? a14.35% b30.00% c14.72% d15.60%
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 firm
Suppose Mullens Corporation is considering three average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,500 23.00% 2 $3,000 30.00% 3 $2,750 24.00% Mullens estimates that it can issue debt at a rate of rd=20.00%rd=20.00% and a tax rate of T=25.00%T=25.00%. It can issue preferred stock that pays a constant dividend of Dp=$20.00Dp=$20.00 per year and at Pp=$200.00Pp=$200.00 per share. Also, its common stock currently sells for P0=$16.00P0=$16.00 per share. The expected dividend payment of the common stock is D1=$4.00D1=$4.00 and the dividend is expected to grow at a constant annual rate of g=5.00%g=5.00% per year. Mullens’ target capital structure consists of ws=75.00%ws=75.00% common stock, wd=15.00%wd=15.00% debt, and wp=10.00%wp=10.00% preferred stock. 1.According to the video, the after-tax cost of debt can be stated as ________________ . Plugging in the values for rdrd and (T)T yields an after-tax cost of…
Suppose Mullens Corporation is considering three average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,500 21.00% $3,000 $2,750 2 3 28.00% 29.00% Mullens estimates that it can issue debt at a rate of ra = 15.00% and a tax rate of T = 10.00%. It can issue preferred stock that pays a constant $200.00 per share. dividend of Dp = : $20.00 per year and at Pp = Also, its common stock currently sells for Po $20.00 per share. The expected dividend payment of the common stock is D₁ dividend is expected to grow at a constant annual rate of g = 5.00% per year. Mullens' target capital structure consists of Ws = 75.00% common stock, wd = 15.00% debt, and wp = 10.00% preferred stock. According to the video, the after-tax cost of debt can be stated as approximately According to the video, the cost of preferred stock can be stated as of approximately = $5.00 and the Plugging in the values for rd and (T) yields an after-tax cost of debt of…
Marcus Inc., a manufacturing firm with no debt outstanding and a market value of $100 million is considering borrowing $ 40 million and buying back stock. Assuming that the interest rate on the debt is 9% and that the firm faces a tax rate of 21%, answer the following question: Estimate the present value of all future interest tax savings, assuming that the debt change is permanent. Group of answer choices a. 21m b. 8.4m c. 0.756m d. 1.89m
15. Sanitorium Brewing Company (SBC) must set its investment and dividend/repurchases policies for next year. It has 900,000 shares and its expected share price next year is $32.00. It can select from three independent projects, each of which will require a $3.5M investment. The projects have different risk levels, so SBC is appropriately evaluating them using different costs of capital. Assuming normal cashflows, the projected IRRS and costs of capital follow: Cost of Capital IRR 20% Project A: Project B: Project C: 17% 13% 10% 7% 9% SBC wants to maintain its 40% debt and 60% common equity capital structure, and it expects net income of $5.0M next year. If SBC also keeps its residual dividend policy (with all distributions as dividends, not share repurchases), what will its payout ratio be next year?
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project 1 2 3 4 $2.000 Open spreadsheet Cost Cost of debt 3,000 5,000 2.000 Project 1 Project 2 Project 3 Project 4 Expected Rate of Return 16.00% The company estimates that it can issue debt at a rate of r = 9%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $5 per year at $44 per share. Also, common stock currently sells for $33 per share; the next expected dividend, D₂, is $4.00; and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. The data has been collected in the Microsoft Excel Online e below. Open the spreadsheet and perform the required analysis to answer the questions below. % 15.00 a. What is the cost of each of the capital components? Round your answers to two decimal places. Do not round your intermediate…
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 9%, and its tax rate is 35%. It can issue preferred stock that pays a constant dividend of $3 per year at $44 per share. Also, its common stock currently sells for $36 per share; the next expected dividend, D1, is $3.75; and the dividend is expected to grow at a constant rate of 7% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. A. What is the cost of each of the capital components? Round your answers to two decimal places. Do not round your intermediate calculations. Cost of debt Cost of preferred stock Cost of retained earnings B. What is Adamson's WACC? Round your answer to two decimal places. Do not round your intermediate calculations.
Huang Industries is considering a proposed project whose estimated NPV is $12 million. This est However, the CFO realizes that conditions could be better or worse, so she performed a scenaric Economic ScenarioProbability of Outcome NPV Recession 0.05 ($86 million) Below average 0.20 (14 million) Average 0.50 12 million Above average 0.20 24 million Вoom 0.05 40 million Calculate the project's expected NPV, standard deviation, and coefficient of variation. Enter your deviation in millions. For example, an answer of $13,000,000 should be entered as 13. Do not re decimal places. E(NPV): million ONPV: million