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Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate
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- Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $15.2 million due in one year. If left vacant, the land will be worth $10.2 million in one year. Alternatively, the firm can develop the land at an up-front cost of $19.6 million. The developed the land will be worth $35.9 million in one year. Suppose the risk-free interest rate is 9.7%, assume all cash flows are risk-free, and there are no taxes. a. If the firm chooses not to develop the land, what is the value of the firm's equity today? What is the value of the debt today? b. What is the NPV of developing the land? c. Suppose the firm raises $19.6 million from the equity holders to develop the land. If the firm develops the land, what is the value of the firm's equity today? What is the value of the firm's debt today? d. Given your answer to part (c), would equity holders be willing to provide the $19.6 million needed to develop the land? a. If the firm chooses not to develop the land,…arrow_forwardSuppose that Banana Computers has $1,000 in revenue this year, along with COGS of $400 and SG&A of $100. The required rate of return on its equity is 14%, and the risk-free rate is 5%. Assume that the COGS only include the marginal costs of selling a computer. Banana is considering adding $700 worth of debt with a coupon rate of 5% and an YTM of 7.9% to its capital structure. Suppose, revenues fall by $300,what is the percent change in net income with and without the debt? Assume that the total variable production costs remain the same. (Round the answer to one decimal places.) a. 59.2% and 40.8% b. 60.0% and 64.5% c. 64.5% and 60% d. 40.8% and 59.2%arrow_forwardConsider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%. Suppose that you borrow only $60,000 in financing the project. According to MM, the firm's equity cost of capital will be closest to: 45% 30% 35% 25%arrow_forward
- A company is considering investing in a new project that requires an initial investment of $1,000,000. The projected cash flows from the project are as follows: Year 1: $300,000 Year 2: $400,000 Year 3: $500,000 Year 4: $600,000 The company's required rate of return for similar projects is 12%. What is the Net Present Value (NPV) of the project? What is the Internal Rate of Return (IRR) of the project? YOU MUST SHOW CALCULATIONS TO BACK UP YOUR SELECTION. -$100,000// 12% $250,000 // 10% $250,000 // 14% $350,000 // 14% $50,000 // %14arrow_forwardApex Corporation’s economic unit estimates that the probability of a good business environment next year is equal to the probability of a bad environment. Knowing that, the managers of Apex must choose between two mutually exclusive projects, project A and project B, which will provide the only assets of the firm. Apex has outstanding a zero coupon bond with a face value of $300m, maturing next year, when the project chosen will have its only payoff. The firm has currently available cash of $200m. Project A requires an initial investment of $100m, while project B requires $200m; final payoffs one year from now are: State of the economy: Good. Bad Probability: 1/2 1/2 Project A 400m 300m Project B 800m. 50marrow_forwardA firm is considering investing in a project that is expected to generate total free cash flows of $58 million next year. After that they are expected to grow at 1.0%. To finance this project the firm will maintain a constant 65% of the firm value as debt, has a cost of capital of the firm's assets of 7.5%, corporate tax rate of 35%, and cost of debt capital of 4.7%. What is the value of this project? Round your answer to the nearest million-so for example $187,103,202.338 would be "187".arrow_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_forwardConsider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%. Suppose that you borrow $30,000 in financing the project. According to MM proposition II, the firm's equity cost of capital will be closest to: A. 15% B. 25% C. 17% D. 20%arrow_forwardConsider a project with free cash flows in one year of $90 000 in a weak economy or $117 000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $40 000, and the project's cost of capital is 15.9%. The risk-free interest rate is 5%. Suppose that to raise the funds for the initial investment the firm borrows $20 000 at the risk-free rate and issues new equity to cover the remainder. In this situation, the value of the firm's levered equity from the project is closest to: a. $49301 b. $89301 c. $83500 d. $69301 Suppose an investment is equally likely to have a 37.9% return or a -20% return. The total volatility of returns is closest to: O a. 28.95% b. 8.38% c. 20.47% d. 40.94% Clear my choicearrow_forward
- Suppose that your bank is considering investing in a one-year project. The investment will cost $10 million and has an 80% chance of generating $19 million income, a 10% chance of generating $13 million income, a 7% chance of generating $8 million income and a 3% chance of generating nothing. What information does the Expected Shortfall measure provide which the VaR does not?arrow_forwardConsider an entrepreneur who plans to invest in a project that requires an initial investment of $1,800 this year. The project will generate either $1,600 or $4,200 next year. The cash flows of the project depend on whether the economy is weak or strong. Both scenarios are equally likely. The risk-free rate is 4% and the risk premium of the project is 12%. Assume perfect capital markets. Now assume that the entrepreneur will borrow $400 at 5% interest rate to finance the project. The cost of equity of the project is closest to: 16.60% 17.72% 18.29% 19.43% None of the abovearrow_forwardCelestial Crane Cosmetics is analyzing a project that requires an initial investment of $3,225,000. The project's expected cash flows are: Year Cash Flow Year 1 $375,000 Year 2 -125,000 Year 3 500,000 Year 4 400,000 If the company's WACC is 8% and the project has the same risk as the firm's average project, what is the project's modified internal rate of return (MIRR)? Should you accept or reject this project?arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT