a
Adequate information:
Debt-equity ratio
Debt
Equity
Capital required
Equity flotation cost
Debt flotation cost
To compute: Rationale behind borrowing the entire amount.
Introduction: Borrowing for a new project is a way for the company to finance the new project using external funds which allows the company to use the internal fund for working capital requirements. Debt financing for the entire project changes the capital structure of the company.
b
Adequate information:
Debt-equity ratio
Debt
Equity
Capital required
Equity flotation cost
Debt flotation cost
To compute: Weighted average flotation cost
Introduction: Weighted average flotation cost is the determination of the proportion of the project to be financed with equity and the proportion to be financed with debt.
c
Adequate information:
Debt-equity ratio
Debt
Equity
Capital required
Equity flotation cost
Debt flotation cost
To compute: True cost of building a new assembly line
Introduction: Weighted average flotation cost is the determination of the proportion of the project to be financed with equity and the proportion to be financed with debt.
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Corporate Finance
- Suppose your company needs $11 million to build a new assembly line. Your target debt- equity ratio is .35. The flotation cost for new equity is 7 percent, but the flotation cost for debt is only 4 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small. a. What is your company's weighted average flotation cost, assuming all equity is raised externally? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the true cost of building the new assembly line after taking flotation costs into account? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole number, e.g., 1,234,567.) a. Flotation cost b. Amount raised %arrow_forwardSuppose your company needs $15 million to build a new assembly line. Your target debt-equity ratio is .65. The flotation cost for new equity is 8 percent, but the flotation cost for debt is only 5 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small. a. What is your company’s weighted average flotation cost, assuming all equity is raised externally? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the true cost of building the new assembly line after taking flotation costs into account? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar, e.g. 1,234,567.)arrow_forwardSuppose your company needs $17 million to build a new assembly line. Your target debt- equity ratio is .75. The flotation cost for new equity is 10 percent, but the flotation cost for debt is only 7 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small. a. What is your company's weighted average flotation cost, assuming all equity is raised externally? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the true cost of building the new assembly line after taking flotation costs into account? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,5667.) a. Flotation cost b. Amount raised %arrow_forward
- suppose your company needs $43 million to build a new assembly line. your target debt-equity ratio is .75. the flotation cost for new equity is 6 percent, but the flotation cost for debt is only 2 percent. your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small.arrow_forwardWhich of the following would not be considered in capital budgeting cash flow analysis? Question 6 options: You are considering running your business out of your home. You own your home (i.e. no mortgage) and the value of the house is $200,000. You have paid a consultant $10,000 for a marketing analysis related to a capital budgeting project that you are analyzing. This fee has been paid and cannot be recovered if you do not go ahead with the project. Coke is considering a new line of lite beverages. If Coke goes ahead with this investment, it will cannibalize sales of Coke's existing drink lines.arrow_forwardA company borrows $4 to finance a project. It has two choices when beginning the project. The first option has potential payoff of either $2 or $8 (both equally likely). The second option has potential payoffs of $0 or $16 (both equally likely). The lender would prefer the _____ option because the expected value of the first option is option is and the expected value of the second first; $3; $2 first; $8; $5 second; $5; $8 second; $16; $4arrow_forward
- You are considering an investment in a clothes distributer. The company needs $105,000 today and expects to repay you $120,000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 17%. What does the IRR rule say about whether you should invest? What is the IRR of this investment oppurtunity? The IRR of this investment opppurtunity is ____%arrow_forwardA firm is considering two investment projects, Y and Z. These projects are NOT mutually exclusive. Assume the firm is not capital constrained. The initial costs and cashflows for these projects are: 0 1 2 3 Y -40,000 17,000 17,000 15,000 Z -28,000 12,000 12,000 20,000 Using a discount rate of 9% calculate the net present value for each project. What decision would you make based on your calculations? How would your decision change if the discount rate used for calculating the net present value is 15%? Calculate an approximate IRR for each project. Assume the hurdle rate is 9%. What decision would you make based on your calculations? Calculate the payback period for each project. The company looks to select investment projects paying back in 2 years. What decision would you make based on your calculations? Critically discuss Net Present Value (NPV), Internal Rate of Return (IRR) and payback period as criteria for investment appraisal.arrow_forward3. An entrepreneur has two projects to choose between. Both require an investment of $1 which must be borrowed. The projects produce gross returns in one year as follows.: Project Risky Safe payoff if failure ($) payoff if success ($) 10 probability of success 2/10 6/10 Suppose there are 100 such entrepreneurs. A bank cannot observe the project choice of an entrepreneur. Call the gross repayment the loan requires when the project succeeds R: i What is the relationship between the R the bank charges and the project chosen by the entrepreneur? Explain in detail ii. Over what ranges of R will the safe and risky projects, respectively, be chosen? What is the maximum R banks can charge consistent with the entrepreneur choosing the safe project? Explain. ii. What R will banks charge and why?arrow_forward
- 1. Distinguish between payback and discounted payback period. 2. As a student of finance, what is your biggest issue with using the payback period to make investme decisions? 3. List two (2) advantages and two (2) disadvantages of using NPV to decide between projects. Problem 1 BioTech Industries is considering two mutually exclusive projects. The firm which has a 15% cost of capital, has estimated its cash flows as shown in the table below. PV Factor 15% Years A B Years -350000 -50000 1 45000 24000 1 0.8696 65000 22000 2 0.7561 3 65000 19500 3 0.6575 4 440000 14600 4 0.5718 a) Calculate each project's discounted payback period. b) Calculate the Net Present Value (NPV) for each project. c) Indicate which project should be chosen and why? d) Calculate the Internal Rate of Return (IRR) for Project B given the IRR range is between 20% - 26%. e) Based on all the above findings, recommend the best project. Explain.arrow_forward不 Data table You are choosing between two projects. The cash flows for the projects are given in the following table ($ million): a. What are the IRRS of the two projects? b. If your discount rate is 4.6% what are the NPVS of the two projects? c. Why do IRR and NPV rank the two projects differently? a. What are the IRRS of the two projects? The IRR for project A is ☐ %. (Round to one decimal place.) (Click on the following icon in order to copy its contents into a spreadsheet.) Project A Year 0 - $49 Year 1 $24 B - $99 $18 Year 2 $21 $40 Print Done Year 3 Year 4 $19 $14 $50 $61arrow_forwardYour company is currently considering two investment projects. Each project requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and the investments will produce the after tax cash flows on the attached image . a)Calculate the payback period for both projects,then compare to identify which project the firm should undertake. b)Evaluate the advantages and disadvantages of using the payback method in investment decisions and assess the situations where it should be used .arrow_forward
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