Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Related questions
Question
Sports EX Inc. is a Sports Shoes Company which is considering investing in a new equipment for the production of a new line of Tennis and Football Shoes for its elite customers. The new equipment will cost $250,000, and an additional $80,000 is needed for installation. The equipment which falls into the MACRS 3-yr class, would be sold after three years for $35,000.
The equipment will generate additional annual revenues of $210,000, and will have annual operating expenses of $60,000. An inventory investment of $60,000 is required during the life of the project. Sports EX is in the 30 percent tax bracket, and has the same risk as the firm’s existing assets.
The capital required for the project has been arranged as follows:
Debt: 1,000 8%, 10-year, semi-annual coupon bonds with a par value of $100, each selling for 90% of its face value
Common stock: 2,500 shares selling for $96 each with a beta of 1.05. The market’s
You are required to:
1. Compute the after-tax cost of debt
2. Compute the cost of common stock
3. Compute the WACC
4. Compute the initial outlay of the project
5. Calculate the annual after-tax OCF for years 1-3
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by stepSolved in 2 steps
Knowledge Booster
Similar questions
- Cisco is considering the development of a wireless home networking appliance, called HomeNet. The company expects to sell 370000 units per year over the project's life at an expected wholesale price of 170. Actual production will be outsourced at a cost of 96 per unit. Additionally, the company will spend $27000 in interest expense each year towards financing the project. In year 1, the firm must increase its accounts receivable by $870000, which will return to regular levels at the end of the project. The company spent $291000 last year on software to develop the router. $106.8 million of new equipment will be purchased and then depreciated using the straight line method over a 10-year life. They expect the market value of the equipment to depreciate at 6.6% per year. The project is expected to end in year 7. The current tax rate is 21%. Use this rate for both income tax rate and the capital gains rate. The WACC for the company is 12.6%. What is the NPV of the project?μ-arrow_forwardBlossom Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $11.80 million. This investment will consist of $2.00 million for land and $9.80 million for trucks and other equipment. The land, all trucks, and all other equipment are expected to be sold at the end of 10 years for a price of $5.00 million, which is $2.00 million above book value. The farm is expected to produce revenue of $2.00 million each year, and annual cash flow from operations equals $1.90 million. The marginal tax rate is 25 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment. (Do not round factor values. Round final answer to 2 decimal places, e.g. 5,275.25.) NPV $ The project should bearrow_forwardUnited Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $125,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.35 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expects to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $450,000. Finally, the project requires an immediate Investment in working capital of $375,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of hog feed are expected to be $4.70 million, and thereafter, sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing costs…arrow_forward
- United Pigpen (UP) is considering a proposal to manufacture high protein hog feed. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year’s rental charge on the warehouse is $260,000, and thereafter the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $3.1 million. This could be depreciated for tax purposes over 10 years. However, UP expects to terminate the project at the end of eight years and to resell the plant and equipment in year 8 for $1,040,000. Finally, the project requires an initial investment in working capital of $910,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of hog feed are expected to be $10.9 million, and thereafter sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing costs are…arrow_forwardParker & Stone, Incorporated, is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $7.4 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent facilities elsewhere. If the land were sold today, the company would net $10.2 million. The company now wants to build its new manufacturing plant on this land; the plant will cost $21.4 million to build, and the site requires $890,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? Note: Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole number, e.g., 1,234,567. Answer is complete but not entirely correct. Cash flow $ 32,490,000 xarrow_forwardYou own a coal mining company and are considering opening a new mine. The mine will cost $119.5 million to open. If this money is spent immediately, the mine will generate $21.5 million for the next 10 years. After that, the coal will run out and the site must be cleaned and maintained at environmental standards. The cleaning and maintenance are expected to cost $1.6 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 7.6%, what does the NPV rule say? NPV ($ mil पात 10 15 et Discount Rate (%) What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.) A. Accept the opportunity because the IRR is greater than the cost of capital. B. There are two IRRS, so you cannot use the IRR as a criterion for accepting the opportunity. O C. Reject the opportunity because the IRR is lower than the 7.6% cost of capital. D. The IRR is r= 11.46%, so accept the opportunity.…arrow_forward
- Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $4 million to set up and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $8 million during this year and depreciation expense will be another $2 million. THSI will require no working capital for this investment. THSI's tax-rate is 20% Assume that THSI's cost of capital for this project is 15%. The net present value (NPV) of this temporary housing project is closest to:arrow_forwardEggz, Incorporated, is considering the purchase of new equipment that will allow the company to collect loose hen feathers for sale. The equipment will cost $455,000 and will be eligible for 100 percent bonus depreciation. The equipment can be sold for $63,000 at the end of the project in 5 years. Sales would be $347,000 per year, with annual fixed costs of $53,000 and variable costs equal to 40 percent of sales. The project would require an investment of $37,000 in NWC that would be returned at the end of the project. The tax rate is 21 percent and the required return is 13 percent. Calculate the NPV of this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.arrow_forwardXYZ is evaluating a project that would require the purchase of a piece of equipment for $560,000 today. During year 1, the project is expected to have relevant revenue of $761,000, relevant costs of $205,000, and relevant depreciation of $130,000. XYZ would need to borrow $560,000 today to pay for the equipment and would need to make an interest payment of $38,000 to the bank in 1 year. Relevant net income for the project in year 1 is expected to be $337,000. What is the tax rate expected to be in year 1? O A rate less than 16.43% or a rate greater than 52.83% O A rate equal to or greater than 16.43% but less than 21.92% O A rate equal to or greater than 21.92% but less than 24.67% O A rate equal to or greater than 24.67% but less than 35.22% O A rate equal to or greater than 35.22% but less than 52.83%arrow_forward
- Midwest Airlines (MWA) is planning to expand its fleet of jets to replace some old planes and to expand its routes. It has received a proposal to purchase 112 small jets over the next 4 years. What annual net revenue must each jet produce to break even on its operating cost? The analysis should be done by finding the EUAC for the 10-year planned ownership period. MWA has a MARR of 12%, purchases the jet for $22 million, has operating and maintenance costs of $3.2 million the first year, increasing 8% per year, and performs a major maintenance upgrade costing $4.5M at end of Year 5. Assume the plane has a salvage value at end of Year 10 of $13 million.arrow_forwardSports EX Inc. is a Sports Shoes Company which is considering investing in a new equipment for the production of a new line of Tennis and Football Shoes for its elite customers. The new equipment will cost $250,000, and an additional $80,000 is needed for installation. The equipment which falls into the MACRS 3-yr class, would be sold after three years for $35,000. The equipment will generate additional annual revenues of $210,000, and will have annual operating expenses of $60,000. An inventory investment of $60,000 is required during the life of the project. Sports EX is in the 30 percent tax bracket, and has the same risk as the firm’s existing assets.The capital required for the project has been arranged as follows:Debt: 1,000 8%, 10-year, semi-annual coupon bonds with a par value of $100, each selling for 90% of its face valueCommon stock: 2,500 shares selling for $96 each with a beta of 1.05. The market’s rate of return is 11% and risk-free investments offer a 4% return.You are…arrow_forwardBig Rock Brewery currently rents a bottling machine for $55,000 per year, including all maintenance expenses. The company is considering purchasing a machine instead and is comparing two options: a. Purchase the machine it is currently renting for $165,000. This machine will require $20,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $260,000. This machine will require $16,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year. Also, $39,000 will be spent upfront in training the new operators of the machine. Suppose the appropriate discount rate is 9% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the rental of the machine. Assume also that the machines are subject to a CCA rate of 45% and there will be a negligible salvage value in ten year's time (the end of each machine's life). The marginal corporate tax rate is 35%. Should Big Rock…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education