Threes Company is evaluating a new project. Mr. Jack Tripper, Chief Financial Officer, has received pro...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Threes Company is evaluating a new project. Mr. Jack Tripper, Chief Financial Officer, has received pro forma income statements for the project from the Controller's office and wants to know whether the new project will increase shareholders' wealth. The estimated initial project cost is $25 million to undertake this six year project. The project is expected to generate the following cash flows for the next six years: $5.2 million in year 1; $6.6 million in year 2, $7.6 million in year 3; $8.7 million in year 4, $8.2 million in year 5; $9.8 million in year 6 including salvage value and recovery of working capital. The firm's tax rate is 30%. Current market interest rate on a six-year bank loan is 6%. The firm's target payback period is four years. Threes's financing policy is to actively maintain a target debt ratio (D/D+E) at 50% (or 100% debt-to-equity ratio) during the life of the project. Mr. Jack Tripper is considering issuing a 6- year bond with 6% annual coupon on the $1,000 par, payable semi-annually, for $10 million. Threes uses the CAPM in estimating shareholders' opportunity cost: the risk-free rate is 4.3%, the market risk premium is 6.5%, and the project's beta is 1.80, respectively. Threes' current dividend yield is 3% a year. 2. 3. (12) Compute: the WACC of the project. (5) Compute the NPV and IRR of the project. 4. (5) Compute the present value of tax shields of this 6 year bond. 5. (5) A junior financial manager suggests Jack to issue six-year zero-coupon bonds with a $1,000 par. Compute the number of zero-coupon bonds that Threes should issue to finance $10 million and the PVTS on these zero-coupon bonds. 6. (5) Another junior manager suggests Jack to issue premium bonds with 100% coupon rate, payable semi- annually, with a $1,000 par. Compute the number of bonds that Threes should issue to finance $25 million and also compute the PVTS on these 100%coupon bonds. Threes Company is evaluating a new project. Mr. Jack Tripper, Chief Financial Officer, has received pro forma income statements for the project from the Controller's office and wants to know whether the new project will increase shareholders' wealth. The estimated initial project cost is $25 million to undertake this six year project. The project is expected to generate the following cash flows for the next six years: $5.2 million in year 1; $6.6 million in year 2, $7.6 million in year 3; $8.7 million in year 4, $8.2 million in year 5; $9.8 million in year 6 including salvage value and recovery of working capital. The firm's tax rate is 30%. Current market interest rate on a six-year bank loan is 6%. The firm's target payback period is four years. Threes's financing policy is to actively maintain a target debt ratio (D/D+E) at 50% (or 100% debt-to-equity ratio) during the life of the project. Mr. Jack Tripper is considering issuing a 6- year bond with 6% annual coupon on the $1,000 par, payable semi-annually, for $10 million. Threes uses the CAPM in estimating shareholders' opportunity cost: the risk-free rate is 4.3%, the market risk premium is 6.5%, and the project's beta is 1.80, respectively. Threes' current dividend yield is 3% a year. 2. 3. (12) Compute: the WACC of the project. (5) Compute the NPV and IRR of the project. 4. (5) Compute the present value of tax shields of this 6 year bond. 5. (5) A junior financial manager suggests Jack to issue six-year zero-coupon bonds with a $1,000 par. Compute the number of zero-coupon bonds that Threes should issue to finance $10 million and the PVTS on these zero-coupon bonds. 6. (5) Another junior manager suggests Jack to issue premium bonds with 100% coupon rate, payable semi- annually, with a $1,000 par. Compute the number of bonds that Threes should issue to finance $25 million and also compute the PVTS on these 100%coupon bonds.
Expert Answer:
Answer rating: 100% (QA)
1 Compute the WACC of the project Cost of Equity Rf Rm Rf 43 1865 1194 Cost of Deb... View the full answer
Related Book For
Fundamental Managerial Accounting Concepts
ISBN: 978-0078110894
6th Edition
Authors: Edmonds, Tsay, olds
Posted Date:
Students also viewed these finance questions
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Knoko Systems is considering a capital budgeting project with a life of five years that requires an outlay of $90,000. It has free cash flows each period as shown in the following distribution:...
-
Use Gauss-Jordan elimination to solve: 2x1 + x2 - x3 = 1 5x1 + 2x2 + 2x3 = 24 3x1 + x2 + x3 = 5 Do not employ pivoting. Check your answers by substituting them into the original equations.
-
Find each sum or difference, if possible. 0. 12 0 -14. 11 0 -4 0]
-
What is the function of a vibration isolator?
-
Leah Friend is trying to decide which of two different kinds of candy to sell in her retail candy store. One type is a name brand candy that will practically sell itself. The other candy is cheaper...
-
A local Dunkin Donuts franchise must buy a new piece ofequipment in 5 years that will cost $88,000. The company is settingup a sinking fund to finance the purchase. What will the quarterlydeposit be...
-
This case involves investigation of the factors that affect the sale price of Oceanside condominium units. It represents an extension of an analysis of the same data by Herman Kelting. Although condo...
-
What is the value of the finite population correction factor in the formula for \(\sigma_{\bar{X}}^{2}\) when (a) \(n=8\) and \(N=640\) ? (b) \(n=100\) and \(N=8,000\) ? (c) \(n=250\) and...
-
Do Babies Understand Probability? Can babies reason probabilistically? A study investigates this by showing ten- to twelve-month-old infants two jars of lollipop-shaped objects colored pink or black....
-
The following is the time taken (in hours) for the delivery of 8 parcels within a city: 28,32,20,26, 42,40,28, and 30 . Use these figures to judge the reasonableness of delivery services when they...
-
Use the data of part (a) of Exercise 8.13 to estimate \(\sigma\) for the Brinell hardness of Alloy 1 in terms of (a) the sample standard deviation; (b) the sample range. Compare the two estimates by...
-
If the distribution of scores of all students in an examination has a mean of 296 and a standard deviation of 14 , what is the probability that the combined gross score of 49 randomly selected...
-
The ledger balances at 30 September 2021 extracted from the books of Hodgson Limited are as follows: Revenue Inventories Cost of sales Selling and distribution costs Administrative expenses Other...
-
On October 1, 2021, Adoll Company acquired 2,600 shares of its $1 par value stock for $38 per share and held these shares in treasury. On March 1, 2023, Adoll resold all the treasury shares for $34...
-
Reid Electronics Company experienced the following events during its first accounting period. 1. Received $120,000 cash by issuing common stock. 2. Paid $18,000 cash for wages to production workers....
-
Vertical analysis Required Use the financial statements for Addison Company from Problem 13-22B to perform a vertical analysis (based on total assets, total equities, and sales) of both the balance...
-
Reed Corporation makes a health beverage named Reed that is manufactured in a two-stage production process. The drink is first created in the Conversion Department where material ingredients (natural...
-
Thermos flask is an example of ................ system.
-
In a ................, mass, momentum and energy may flow.
-
The thermodynamic properties which depend on the mass of the system are called ................ properties.
Study smarter with the SolutionInn App