Aman Group, Inc. (AGI), wants to raise funds to expand its executive recreational facilities. The senior...

 

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Aman Group, Inc. (AGI), wants to raise funds to expand its executive recreational facilities. The senior financial officer at AGI has gathered the following information in an effort to determine the firm's cost of capital. AGI typically obtains 75% of its capital by issuing debt. The interest rate on U.S. Treasury bills is 2.5%. The marginal tax rate is 25%. Projected profit for next year is $24,000,000. Profit is expected to grow at an annual rate of 5%. AGI long-term bonds yield 8% (remember that firms can raise capital through borrowing by issuing corporate bonds). The firm typically pays out 40% of its annual profit in dividends. It currently has 4,000,000 shares of stock outstanding and shares are trading at a price of $50. AGI's beta coefficient (B) is 2 and the industry, of which AGI is a part, offers an average rate of return of 4%. Use this information to calculate: (A) The firm's after-tax cost of debt. (B) The firm's cost of equity capital using the "risk-free rate pluss premium" model. (C) The firm's cost of equity capital using the "dividend valuation" model. (D) The firm's cost of equity capital using the "capital asset pricing model" model. (E) The firm's weighted cost of capital (WACC) based on the answers of sections A, B, C and D above? (F) If the firm based on the WACC decided to adopt the expansion project proposed by its planning manager. What would be the implied IRR of the firm? Aman Group, Inc. (AGI), wants to raise funds to expand its executive recreational facilities. The senior financial officer at AGI has gathered the following information in an effort to determine the firm's cost of capital. AGI typically obtains 75% of its capital by issuing debt. The interest rate on U.S. Treasury bills is 2.5%. The marginal tax rate is 25%. Projected profit for next year is $24,000,000. Profit is expected to grow at an annual rate of 5%. AGI long-term bonds yield 8% (remember that firms can raise capital through borrowing by issuing corporate bonds). The firm typically pays out 40% of its annual profit in dividends. It currently has 4,000,000 shares of stock outstanding and shares are trading at a price of $50. AGI's beta coefficient (B) is 2 and the industry, of which AGI is a part, offers an average rate of return of 4%. Use this information to calculate: (A) The firm's after-tax cost of debt. (B) The firm's cost of equity capital using the "risk-free rate pluss premium" model. (C) The firm's cost of equity capital using the "dividend valuation" model. (D) The firm's cost of equity capital using the "capital asset pricing model" model. (E) The firm's weighted cost of capital (WACC) based on the answers of sections A, B, C and D above? (F) If the firm based on the WACC decided to adopt the expansion project proposed by its planning manager. What would be the implied IRR of the firm?

Answer rating: 100% (QA)

A The firms aftertax cost of debt 8 x 1 25 6 B The firms cost ... View the full answer