Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Question
Chapter 13, Problem 23QAP
Summary Introduction
Adequate information:
Debt-equity ratio
Debt
Equity
Project cost
Equity flotation cost
Debt flotation cost
Percentage equity raised internally
Project financed through retained earnings
To compute: Project cost for the company B.
Introduction: The Cost of capital refers to the minimum return required by a company to justify the value incurred on the project.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Flotation Costs
Lucas Corp. has a debt-equity ratio of .65. The company
is considering a new plant that will cost $51 million to build. When the company
issues new equity, it incurs a flotation cost of 7 percent. The flotation cost on new
debt is 2.7 percent. What is the initial cost of the plant if the company raises all equity
externally? What if it typically uses 60 percent retained earnings? What if all equity
investment is financed through retained earnings?
Your company is evaluating a new factory that will cost $14 million to build. Your target debt-equity
ratio is 1. The flotation cost for new equity is 7% and the flotation cost for new debt is 4%. The
company is planning to use retained earnings for 50% of the equity financing. What are the weighted
average flotation costs as a fraction of the amount invested? What are the flotation costs (in $ million
)?
Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is
expected to generate free cash flows of $1.49 million per year, growing at a rate of 2.3% per year. Goodyear has an
equity cost of capital of 8.6%, a debt cost of capital of 6.7%, a marginal corporate tax rate of 34%, and a debt-equity
ratio of 2.4. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax
amount must it receive for the plant for the divestiture to be profitable?
A divestiture would be profitable if Goodyear received more than $
million after tax. (Round to one decimal place.)
Chapter 13 Solutions
Corporate Finance
Ch. 13 - Project Risk If you can borrow all the money you...Ch. 13 - WACC and Taxes Why do we use an aftertax figure...Ch. 13 - SML Cost or Equity Estimation If you use the stock...Ch. 13 - SML Cost or Equity Estimation What are the...Ch. 13 - Prob. 5CQCh. 13 - Cost of Capital Suppose Tom OBedlam, president of...Ch. 13 - Company Risk versus Project Risk Both Dow Chemical...Ch. 13 - Prob. 8CQCh. 13 - Leverage Consider a levered firms projects that...Ch. 13 - Beta What factors determine the beta of a stock?...
Ch. 13 - Prob. 1QAPCh. 13 - Prob. 2QAPCh. 13 - Prob. 3QAPCh. 13 - Prob. 4QAPCh. 13 - Prob. 5QAPCh. 13 - Prob. 6QAPCh. 13 - Prob. 7QAPCh. 13 - Prob. 8QAPCh. 13 - Prob. 9QAPCh. 13 - Prob. 10QAPCh. 13 - Prob. 11QAPCh. 13 - Prob. 12QAPCh. 13 - Prob. 13QAPCh. 13 - Prob. 14QAPCh. 13 - Prob. 15QAPCh. 13 - Prob. 16QAPCh. 13 - Prob. 17QAPCh. 13 - Prob. 18QAPCh. 13 - Prob. 19QAPCh. 13 - Prob. 20QAPCh. 13 - Prob. 21QAPCh. 13 - Prob. 22QAPCh. 13 - Prob. 23QAPCh. 13 - Prob. 24QAPCh. 13 - Prob. 1MCCh. 13 - Prob. 2MCCh. 13 - Go to www.reuters.com and find the list of...Ch. 13 - You now need to calculate the cost of debt for...Ch. 13 - You now have all the necessary information to...Ch. 13 - You used Tesla as a representative company to...
Knowledge Booster
Similar questions
- Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.51 million per year, growing at a rate of 2.5% per year. Goodyear has an equity cost of capital of 8.7%, a debt cost of capital of 6.9%, a marginal corporate tax rate of 37%, and a debt-equity ratio of 2.8. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable?arrow_forwardSuppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.46 million per year, growing at a rate of 2.5% per year. Goodyear has an equity cost of capital of 8.7%, a debt cost of capital of 6.8%, a marginal corporate tax rate of 38%, and a debt-equity ratio of 2.5. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable? A divestiture would be profitable if Goodyear received more than how much after tax? (Round to one decimal place.)arrow_forwardThe impact of financial leverage on return on equity and earnings per share Consider the following case of Green Rabbit Transportation Inc.: Suppose Green Rabbit Transportation Inc. is considering a project that will require $200,000 in assets. • The company is small, so it is exempt from the interest deduction limitation under the new tax law. • The project is expected to produce earnings before interest and taxes (EBIT) of $45,000. • Common equity outstanding will be 15,000 shares. • The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Green Rabbit Transportation Inc.’s return on equity (ROE) on the project will be . In addition, Green Rabbit’s earnings per share (EPS) will be . Alternatively, Green Rabbit Transportation Inc.’s CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company’s debt will be 12%. Because the company will finance only 50% of…arrow_forward
- Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.41 million per year, growing at a rate of 2.3% per year. Goodyear has an equity cost of capital of 8.4%, a debt cost of capital of 7.2%, a marginal corporate tax rate of 32%, and a debt-equity ratio of 2.6. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable? A divestiture would be profitable if Goodyear received more than $enter your response here million after tax. (Round to one decimal place.)arrow_forwardDyrdek Enterprises has equity with a market value of $1.8 million and the market value of debt is $3.55 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.6 percent. The new project will cost $2.20 million today and provide annual cash flows of $576,000 for the next 6 years. The company's cost of equity is 11.07 percent and the pretax cost of debt is 4.88 percent. The tax rate is 21 percent. What is the project's NPV?arrow_forwardGive typing answer with explanation and conclusion Suppose that Rose Industries is considering the acquisition of another firm in its industry for $100 million. The acquisition is expected to increase Rose's free cash flow by $5 million the first year, and this contribution is expected to grow at a rate of 3% every year there after. Rose currently maintains a debt to equity ratio of 1, its marginal tax rate is 40%, its cost of debt rD is 6%, and its cost of equity rE is 10%. Rose Industries will maintain a constant debt-equity ratio for the acquisition. Rose's unlevered cost of capital is closest to: 9.0% 8% 7.0% 7.5%arrow_forward
- Dyrdek Enterprises has equity with a market value of $12.6 million and the market value of debt is $4.45 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.9 percent. The new project will cost $2.56 million today and provide annual cash flows of $666,000 for the next 6 years. The company's cost of equity is 11.79 percent and the pretax cost of debt is 5.06 percent. The tax rate is 24 percent. What is the project's NPV? Multiple Choice $208,195 $194,561 $536,049 $183,363 $364,858arrow_forwardRETURN ON EQUITY Central City Construction (CCC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 20%. CCC will own no securities, so all of its income will be operating income. If it so chooses, CCC can finance up to 50% of its assets with debt, which will have an 8% interest rate. If it chooses to use debt, the firm will finance using only debt and common equity, so no preferred stock willbe used. Assuming a 40% tax rate on all taxable income, what is the difference between CCC’s expected ROE if it finances these assets with 50% debt versus its expected ROE if it finances these assets entirely with common stock?arrow_forwardCede & Co. expects its EBIT to be $163000 every year forever. The company can borrow at 8 percent. The company currently has no debt and its cost of equity is 10 percent. The tax rate is 23 percent. If the company borrows $185,000 and uses the proceeds to buy back equity, what is the weighted average cost of capital after the recapitalisation is complete? Group of answer choices 9.67% 15.13% 14.32% 8.17%arrow_forward
- Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of 51.54 million per year, growing at a rate of 2.4% per year. Goodyear has an equity cost of capital of 8,7%, a debt cost of capital of 6.7%, a marginal corporate tax rate of 38%, and a debt- equity ratio of 2.6. If the plant has average risk and Goodyear plans to maintain a constant debt equity ratio, what after tax amount must it receive for the plant for the divestiture to be profitable?arrow_forwardPro forma balance sheet. Next year, California Cement Company will increase its plant, property, and equipment by $6,065,000 with a plant expansion. The inventories will grow by 82%, accounts receivable will grow by 69%, and marketable securities will be reduced by 65% to help finance the expansion. Assume all other asset accounts will remain the same and the company will use long-term debt to finance the remaining expansion costs (no change in common stock or retainedearnings). Using this information and the balance sheet , for California Cement Company for 2013, prepare a pro forma balance sheet for 2014. How much additional debt will the company need using this pro forma balance sheet? Complete the pro-forma balance sheet for 2014 below: (Round to the nearest dollar.) California Cement Company Balance Sheet for the Year Ending December 31, 2013 ASSETS LIABILITIES Current assets Current liabilities Cash $ 1,471,000…arrow_forwardSuppose that Rose Industries is considering the acquisition of another firm in its industry for $137 million. The acquisition is expected to increase Rose's free cash flow by $5 million the first year, and this contribution is expected to grow at a rate of 4% every year thereafter. Rose currently maintains a debt to equity ratio of 1, its corporate tax rate is 21%, its cost of debt rD is 6%, and its cost of equity rE is 10%. Rose Industries will maintain a constant debt-equity ratio for the acquisition. The Free Cash Flow to Equity (FCFE) for the acquisition in year O is closest to ($ Million) (2 decimal places):arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning