Karamazov Semiconductors is considering an investment to expand its existing line of business. The investment will cost

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Karamazov Semiconductors is considering an investment to expand its existing line of business. The investment will cost $10 million and is expected to produce after-tax cash flows of $1 million per year in perpetuity. Karamazov’s capital structure is composed of 50 percent debt and 50 percent equity, and it plans to finance the investment using this same ratio of financing. Karamazov’s pre-tax cost of debt is 8 percent, its tax rate is 25 percent, and its cost of equity is 14 percent.

a. What is Karamazov’s weighted-average cost of capital?

b. Calculate the IRR of the project from the enterprise perspective.

c. Calculate the IRR of the project from the equity perspective.

d. Explain the difference between your two answers in parts (b) and (c).

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Related Book For  answer-question

ISE Analysis For Financial Management

ISBN: 9781265042639

13th International Edition

Authors: Robert C. Higgins Professor, Jennifer Koski

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