3. a) The capital structure of a company consists of debt and common equil firm has...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
3. a) The capital structure of a company consists of debt and common equil firm has 500,000 bonds outstanding that are selling at par value. The par value of each bond is $1,000. Bonds with similar characteristics are yielding a before-tax return of 8 percent. The company also has 30,000,000 shares of common stock outstanding. The stock has a beta of 1.50 and sells for $50 a share. The return on U.S. Treasury bills is percent and the market rate of return is 11 percent. The company's tax rate is 25 percent. What is the firm's weighted average cost of capital? b) The company is considering a five-year project that is expected to generate the following net (or total) after-tax cash flows. Year Operating Cash flow (OCF)* 12345 $1,000,000 3,000,000 4,000,000 6,000,000 7,000,000 *The operating cash flow is defined as after-tax net income + depreciation The initial investment (or initial cost) of the project is $12,000,000. The assets used in the project will have a before-tax market value (salvage or resale value) of $2,000,000 at the end of project in year 5. Assume that the assets are fully depreciated over the five-year life of the project and the book value at the end of year 5 is zero. The project also requires an initial investment in net working capital of $1,000,000, which is fully recoverable when the project ends in year 5. The project has the same risk as the firm overall. Find the net present value (NPV) of the project 3. a) The capital structure of a company consists of debt and common equil firm has 500,000 bonds outstanding that are selling at par value. The par value of each bond is $1,000. Bonds with similar characteristics are yielding a before-tax return of 8 percent. The company also has 30,000,000 shares of common stock outstanding. The stock has a beta of 1.50 and sells for $50 a share. The return on U.S. Treasury bills is percent and the market rate of return is 11 percent. The company's tax rate is 25 percent. What is the firm's weighted average cost of capital? b) The company is considering a five-year project that is expected to generate the following net (or total) after-tax cash flows. Year Operating Cash flow (OCF)* 12345 $1,000,000 3,000,000 4,000,000 6,000,000 7,000,000 *The operating cash flow is defined as after-tax net income + depreciation The initial investment (or initial cost) of the project is $12,000,000. The assets used in the project will have a before-tax market value (salvage or resale value) of $2,000,000 at the end of project in year 5. Assume that the assets are fully depreciated over the five-year life of the project and the book value at the end of year 5 is zero. The project also requires an initial investment in net working capital of $1,000,000, which is fully recoverable when the project ends in year 5. The project has the same risk as the firm overall. Find the net present value (NPV) of the project
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
A certain radioactive isotope is a by - product of some nuclear reactors. Due to an explosion, a nuclear reactor experiences a massive leak of this radioactive isotope. Fortunately, the isotope has a...
-
List five tips for writing an effective career objective on your resume.
-
If the following compounds are heated, one will form one product from a [1, 3] sigmatropic rearrangement and the other will form two products from two different [1, 3] sigmatropic rearrangements....
-
What accounting procedures must be completed before the partnership liquidation process begins?
-
1. Explain how CMA used the four principles of lean operating systems to improve performance. 2. Using information from the case, sketch the original paper-based value chain and compare it to a...
-
88 + F1 ) Q 1: View Assessment $3 N o 2 I W b F2 A < < < S 3 W ..... COME #M 3 X A Assignment #2: CH5 option command O b H E 66 4 ... 3 Akira Numata, a foreign exchange trader at Credit Suisse...
-
Hemming Co. reported the following current-year purchases and sales for its only product. Date Activities Units Sold at Retail Jan. 1 Beginning inventory Jan. 10 Sales Units Acquired at Cost. 275...
-
1. (15 points) You did so well selling concert tickets that you've been put in charge of organising the next concert. Specifically, you need to book a musical act and decide on the ticket price. If...
-
Instructions - President Theater 38518DL Questions will be taken in the Student Lounge Discussion Group 1Enter Your Name Right Here, in Cell B3 - NOW This will put your name on all the pages S22 Save...
-
How do sociological theories interpret the ongoing trends toward secularization, and what impact does this have on traditional religious institutions ?
-
Review the article MSU Donations Drop 25%; NassarEffect Uncertain Addresses the following: You are a member of the External/Donor Relations team at Michigan State University. What would be your...
-
Determine the price of a $380,000 bond issue under each of the following independent assumptions: Note: Use tables, Excel, or a financial calculator. Round your intermediate calculations and final...
-
a reciprocating pump, having a mass of 70 kg, is mounted at the middle of a steel plate of thickness 2 cm, width 60 cm, and length 270 cm, clamped along two edges as shown in figure 2 during...
-
What is the difference between direct materials and indirect materials?
-
Write down careful proofs of the following statements: (a) \(\sqrt{6}-\sqrt{2}>1\). (b) If \(n\) is an integer such that \(n^{2}\) is even, then \(n\) is even. (c) If \(n=m^{3}-m\) for some integer...
-
Prove by contradiction that a real number that is less than every positive real number cannot be positive.
-
Disprove the following statements: (a) If \(n\) and \(k\) are positive integers, then \(n^{k}-n\) is always divisible by \(k\). (b) Every positive integer is the sum of three squares (the squares...
Study smarter with the SolutionInn App