Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Textbook Question
Chapter 14, Problem 20QP
WACC and
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
16. WACC and NPV Och, Inc., is considering a project that will result in initial aftertax cash savings of $1.85 million at the end of the
first year, and these savings will grow at a rate of 3 percent per year indefinitely. The company has a target debt-equity ratio of .65, a
cost of equity of 11 percent, and an aftertax cost of debt of 4.3. percent. The cost-saving proposal is somewhat riskier than the usual
projects the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of
capital for such risky projects. Under what circumstances should the company take on the project?
WACC and NPV
Pink, Inc., is considering a project that will result in initial aftertax cash savings of $1.82 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt-equity ratio of .85, a cost of equity of 12.2 percent, and an aftertax cost of debt of 5 percent. The cost-saving proposal is somewhat riskier than the usual projects the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects.
What is the maximum initial cost the company would be willing to pay for the project?
Lible, Incorporated, is considering a project that will result in initial aftertax cash savings of $1.74 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The firm has a target debt-equity ratio of .75, a cost of equity of 11.4 percent, and an aftertax cost of debt of 4.2 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole number, e.g., 1,234,567.)
Chapter 14 Solutions
Fundamentals of Corporate Finance
Ch. 14.1 - What is the primary determinant of the cost of...Ch. 14.1 - What is the relationship between the required...Ch. 14.2 - What do we mean when we say that a corporations...Ch. 14.2 - Prob. 14.2BCQCh. 14.3 - Why is the coupon rate a bad estimate of a firms...Ch. 14.3 - How can the cost of debt be calculated?Ch. 14.3 - How can the cost of preferred stock be calculated?Ch. 14.4 - Prob. 14.4ACQCh. 14.4 - Prob. 14.4BCQCh. 14.4 - Under what conditions is it correct to use the...
Ch. 14.5 - Prob. 14.5ACQCh. 14.5 - Prob. 14.5BCQCh. 14.6 - Prob. 14.6ACQCh. 14.6 - Why do you think we might prefer to use a ratio...Ch. 14.7 - What are flotation costs?Ch. 14.7 - How are flotation costs included in an NPV...Ch. 14 - A firm has paid dividends of 1.02, 1.10, 1.25, and...Ch. 14 - Prob. 14.3CTFCh. 14 - Why is the tax rate applied to the cost of debt...Ch. 14 - What approach to a projects costs of capital...Ch. 14 - What is the flotation cost of equity for a firm...Ch. 14 - WACC [LO3] On the most basic level, if a firms...Ch. 14 - Book Values versus Market Values [LO3] In...Ch. 14 - Project Risk [LO5] If you can borrow all the money...Ch. 14 - Prob. 4CRCTCh. 14 - DCF Cost of Equity Estimation [LO1] What are the...Ch. 14 - SML Cost of Equity Estimation [LO1] What are the...Ch. 14 - Prob. 7CRCTCh. 14 - Cost of Capital [LO5] Suppose Tom OBedlam,...Ch. 14 - Company Risk versus Project Risk [LO5] Both Dow...Ch. 14 - Divisional Cost of Capital [LO5] Under what...Ch. 14 - Calculating Cost of Equity [LO1] The Absolute Zero...Ch. 14 - Calculating Cost of Equity [LO1] The Graber...Ch. 14 - Calculating Cost of Equity [LO1] Stock in Daenerys...Ch. 14 - Estimating the DCF Growth Rate [LO1] Suppose...Ch. 14 - Prob. 5QPCh. 14 - Calculating Cost of Debt [LO2] Drogo, Inc., is...Ch. 14 - Calculating Cost of Debt [LO2] Jiminys Cricket...Ch. 14 - Prob. 8QPCh. 14 - Calculating WACC [LO3] Mullineaux Corporation has...Ch. 14 - Taxes and WACC [LO3] Lannister Manufacturing has a...Ch. 14 - Finding the Target Capital Structure [LO3] Famas...Ch. 14 - Book Value versus Market Value [LO3] Dinklage...Ch. 14 - Calculating the WACC [LO3] In Problem 12, suppose...Ch. 14 - WACC [LO3] Fyre, Inc., has a target debtequity...Ch. 14 - Prob. 15QPCh. 14 - Prob. 16QPCh. 14 - SML and WACC [LO1] An all-equity firm is...Ch. 14 - Calculating Flotation Costs [LO4] Suppose your...Ch. 14 - Calculating Flotation Costs [LO4] Caughlin Company...Ch. 14 - WACC and NPV [LO3, 5] Scanlin, Inc., is...Ch. 14 - Flotation Costs [LO4] Pardon Me, Inc., recently...Ch. 14 - Calculating the Cost of Debt [LO2] Ying Import has...Ch. 14 - Calculating the Cost of Equity [LO1] Epley...Ch. 14 - Adjusted Cash Flow from Assets [LO3] Ward Corp. is...Ch. 14 - Adjusted Cash Flow from Assets [LO3] In the...Ch. 14 - Prob. 26QPCh. 14 - Prob. 27QPCh. 14 - Flotation Costs and NPV [LO3, 4] Photochronograph...Ch. 14 - Flotation Costs [LO4] Sheaves Corp. has a...Ch. 14 - Project Evaluation [LO3, 4] This is a...Ch. 14 - Prob. 31QPCh. 14 - Prob. 1MCh. 14 - Cost of Capital for Swan Motors You have recently...Ch. 14 - Prob. 3MCh. 14 - Cost of Capital for Swan Motors You have recently...Ch. 14 - Cost of Capital for Swan Motors You have recently...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- A company has a project with initial investment is $40,000. It will generate $15,000 annually for the next four years. Assume that this company and its project have a beta of 2.0, the risk-free rate of return (i.e., Rm) is 2%6, and the market return (i.e., Rm) is 7%6?. How much is the NPV of this project? [Hint: As discussed, the CAMP model can be used to estimate discount rate (r) in the NPV analysis equation). A) 5,555 B) 3,333 4,444 D) 6,666arrow_forwardAriana, Incorporated, is considering a project that will result in initial aftertax cash savings of $6.7 million at the end of the first year, and these savings will grow at a rate of 3 percent per year, indefinitely. The firm has a target debt-equity ratio of .66, a cost of equity of 13.1 percent, and an aftertax cost of debt of 6.1 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +3 percent to the cost of capital for such risky projects. a. Calculate the required return 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. b. What is the maximum cost the company would be willing to pay for this project? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. a. Project required return b. Maximum to pay %arrow_forwardAriana, Incorporated, is considering a project that will result in initial aftertax cash savings of $5.7 million at the end of the first year, and these savings will grow at a rate of 3 percent per year, indefinitely. The firm has a target debt-equity ratio of .56, a cost of equity of 13.1 percent, and an aftertax cost of debt of 5 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. Calculate the required return 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. What is the maximum cost the company would be willing to pay for this project? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.arrow_forward
- Lebleu, Incorporated, is considering a project that will result in initial aftertax cash savings of $1.78 million at the end of the first year, and these savings will grow at a rate of 2 percent per year indefinitely. The firm has a target debt-equity ratio of .80, a cost of equity of 11.8 percent, and an aftertax cost of debt of 4.6 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +3 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole number, e.g., 1,234,567.) Maximum costarrow_forwardLebleu, Incorporated, is considering a project that will result in initial aftertax cash savings of $1.78 million at the end of the first year, and these savings will grow at a rate of 2 percent per year indefinitely. The firm has a target debt-equity ratio of .80, a cost of equity of 11.8 percent, and an aftertax cost of debt of 4.6 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +3 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project?arrow_forwardLebleu, Incorporated, is considering a project that will result in initial aftertax cash savings of $1.71 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The firm has a target debt-equity ratio of .75, a cost of equity of 11.1 percent, and an aftertax cost of debt of 3.9 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole number, e.g., 1,234,567.)arrow_forward
- You are considering a project that will cost $50,000 to set up, and will pay out $18,000 1,2,3 and 4 years from today. The unlevered beta for this project is 1.2, the risk free rate is 6.5%, and the expected return on the S&P 500 is 15%. Corporate taxes are 25%. a. What is the unlevered cost of equity for this project? b. What is the NPV of this project if you finance with all equity? c. You are considering borrowing $30,000 to finance this project, with repayment in 4 years. You could normally borrow at 7.5%. The Nebraska state government has offered to lend you the money at 6%. What is the adjusted present value of this project if you take the subsidized loan?arrow_forwardA company has a project with initial investment is $40,000. It will generate $15,000 annually for the next four years. Assume that this company and its project have a beta of 2.0, the risk-free rate of return (i.e., R is 296, and the market return (Le., R is 796?. How much is the NPV of this project? [Hint: As discussed, the CAMP model can be used to estimate discount rate (r) in the NP analysis equation]. A) 5,555 B) 3,333 C) 4,444 D) 6,666arrow_forwardWe are examining a new project. We expect to sell 5,400 units per year at $68 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $68 x 5,400 = $367,200. The relevant discount rate is 18 percent, and the initial investment required is $1,530,000. What is the base-case NPV? (Do not round Intermedlate calculations and round a. your answer to 2 decimal places, e.g., 32.16.) After the first year, the project can be dismantled and sold for $1.250,000. If expected sales are revised based on the first year's performance, below what level of expected b. sales would it make sense to abandon the project? (Do not round Intermedlate calculotions and round your answer to the nearest whole number, e.g., 32.)arrow_forward
- [NPV|CFs] The firm is considering a project which requires a $5,000 investment and is expected to generate expected cashflows at the end of the next two years in the amount of $4,000. Hurdle rate = 10%. What is the project’s NPV?arrow_forwardLebleu, Incorporated, is considering a project that will result in initial aftertax cash savings of $1.73 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt-equity ratio of .85, a cost of equity of 11.3 percent, and an aftertax cost of debt of 4.1 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole number, e.g., 1,234,567.) The answer I got is $24,749.643 and it is incorrect. This is my work Find WACC = (weight of debt x after tax cost of debt ) + (weight of equity x cost of equity) =(debt/total capital x after tax…arrow_forwardYou are considering an investment opportunity that requires an initial investment of $150 million in period 0. The project will generate only one future payment of $168 million at the end of the first year. The cost of capital is 8% . What is the IRR for the project? [Note that getting the actual value should not require trial and error or a financial calculator, because this is a simple case.] A. 114% B. 8% C. 20% D. 12% E. 10.7% F. 5.6% G. 14% H. 112%arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License