The Gaylord Fishing Company is contemplating entering the fish processing business. The firm currently has a...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The Gaylord Fishing Company is contemplating entering the fish processing business. The firm currently has a very successful business with substantial assets in the form of modern, well equipped fishing boats and fishing quota (rights to catch fish in particular areas) that can be sold in an active market. Gaylord has no long-term debt. The fishing business is, however, quite risky. Since shares in Gaylord were first floated, equity investors have enjoyed high average real returns of 18.3% annually, while the beta coefficient for the firm has, in recent years, been about B = 2.6. The fish processing business is somewhat more stable than the fishing business. Relevant statistics for a publicly traded firm specialized in fish processing, FishGalore Inc., are given in the following tabie: Variable Shares ('000) Share price Equity CAPM beta Debt (Sm market value) Debt CAPM beta FishGalore 563 $17.23 1.25 2.3 0,2 (a) (2 points) Calculate the debt/equity ratio for FishGalore Inc. Some relevant economic data for the economy are presented in the following table: Variable T-Bill nominal interest rate Market risk premium (nominal) Expected inflation rate Coгрorate tax rate Value 4.2% 6.6% 2.2% 34% (b) (6 points) What do you estimate the current real return on equity would be for FishGalore if it were to have zero leverage? The processing plant Gaylord is considering costs $2.5 million, whi ch can be depreciated on a straight-line basis over 10 years. The plant is expected to havezero salvage value after ten years. Gaylord uses the T-Bill rate to calculate the present value of the depreciation tax shield. Assume that Gaylord has sufficient income from its other operations to take full advantage of any los ses for tax purposes. Gaylord projects that it will be able to sell 500,000 pounds of processed product per year over the 10-year life of the project. It anticipates receiving a real price or $3.05 per pound. Variable costs are estimated at $1.95 per pound (in real terms), while annual real fixed (tax deductible) operating costs are estimated to be $ 150,000. (c) (8 points) Calculate the NPV of the proposed inves tment project as an all-equity investment, Now suppose that Gaylord is given the opportunity to finance the full $2.5 million investment with municipal bonds. In the absence of the inter est rate subsidy, Gaylord is told that the nominal interest on its debt would be 6.5% annually, but with the subsidy the firm will only have to pay a nominal annual interest of 4.5%. The bonds would have a maturity of 10 years, at which time they would be redeemed in full. To issue the debt, however. Gavlord would need to pav flotation costs eaual to 1% of the amount raised. These costs, which are funded from retained earnings, can be amortized on a straight-line basis over the life of the loan. (d) (6 points) Calculate the present value of the financial side effects using the nominal bond return to discount future cash flows, and hence obtain the APV of the project. The Gaylord Fishing Company is contemplating entering the fish processing business. The firm currently has a very successful business with substantial assets in the form of modern, well equipped fishing boats and fishing quota (rights to catch fish in particular areas) that can be sold in an active market. Gaylord has no long-term debt. The fishing business is, however, quite risky. Since shares in Gaylord were first floated, equity investors have enjoyed high average real returns of 18.3% annually, while the beta coefficient for the firm has, in recent years, been about B = 2.6. The fish processing business is somewhat more stable than the fishing business. Relevant statistics for a publicly traded firm specialized in fish processing, FishGalore Inc., are given in the following tabie: Variable Shares ('000) Share price Equity CAPM beta Debt (Sm market value) Debt CAPM beta FishGalore 563 $17.23 1.25 2.3 0,2 (a) (2 points) Calculate the debt/equity ratio for FishGalore Inc. Some relevant economic data for the economy are presented in the following table: Variable T-Bill nominal interest rate Market risk premium (nominal) Expected inflation rate Coгрorate tax rate Value 4.2% 6.6% 2.2% 34% (b) (6 points) What do you estimate the current real return on equity would be for FishGalore if it were to have zero leverage? The processing plant Gaylord is considering costs $2.5 million, whi ch can be depreciated on a straight-line basis over 10 years. The plant is expected to havezero salvage value after ten years. Gaylord uses the T-Bill rate to calculate the present value of the depreciation tax shield. Assume that Gaylord has sufficient income from its other operations to take full advantage of any los ses for tax purposes. Gaylord projects that it will be able to sell 500,000 pounds of processed product per year over the 10-year life of the project. It anticipates receiving a real price or $3.05 per pound. Variable costs are estimated at $1.95 per pound (in real terms), while annual real fixed (tax deductible) operating costs are estimated to be $ 150,000. (c) (8 points) Calculate the NPV of the proposed inves tment project as an all-equity investment, Now suppose that Gaylord is given the opportunity to finance the full $2.5 million investment with municipal bonds. In the absence of the inter est rate subsidy, Gaylord is told that the nominal interest on its debt would be 6.5% annually, but with the subsidy the firm will only have to pay a nominal annual interest of 4.5%. The bonds would have a maturity of 10 years, at which time they would be redeemed in full. To issue the debt, however. Gavlord would need to pav flotation costs eaual to 1% of the amount raised. These costs, which are funded from retained earnings, can be amortized on a straight-line basis over the life of the loan. (d) (6 points) Calculate the present value of the financial side effects using the nominal bond return to discount future cash flows, and hence obtain the APV of the project.
Expert Answer:
Answer rating: 100% (QA)
a Debt Equity ratio Long term debt Shareholders equity Long ... View the full answer
Related Book For
Posted Date:
Students also viewed these accounting questions
-
In 2018, Ajax Ltd. completed a very successful year with an increase in its net income of over 20%. Most of this increase occurred because a new manufacturing plant was built almost exclusively...
-
Great Northern Fishing Company is contemplating additional revenue of $26,000 per year for seven years. Additional costs, other than depreciation, will equal $12,000 per year. The smoker has an...
-
Ashley and Betty run a very successful business with a high end celebrity hair salon, A & Bs Happy Hair, Inc. Ashley and Betty also own patents on special hair care products that they sell only...
-
4. In cells B4:B15, type a yearly salary for each staff member. Format these values as Currency with no decimal places. 5. Calculate the new salary with a 10% increase in column C. 6. Calculate the...
-
Use Table 5.1 to find the P-value that corresponds to the standard z-score, and determine whether the alternative hypothesis is supported at the 0.05 significance level. z = 2.7 for Ha: u < 19.4
-
Country Coffee Limited is a restaurant chain specializing in fresh, ready-to-serve coffee. Country Coffee is owned by its sole founder, who began the chain over 20 years ago. Today the business has...
-
Which of the following best describes the level of measurement of the data listed in Exercise 1: nominal, ordinal, interval, ratio? Exercise 1 Literary Digest magazine conducted a poll for the 1936...
-
Record the following transactions in the general journal of White Company: 201X Feb. 5 Purchased land for $93,000. The $93,000 included attorneys fees of $6,300. 18 White Company decided to pave the...
-
Assume the following information: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing overhead Variable selling expense Fixed selling...
-
Use indirect truth tables to determine whether the following groups of statements are consistent or inconsistent. 1. . K (R M) K R M K 2. 3. 4. 5. P S S T T X X J J P 6. 7. 8. 9. 10....
-
The universal life policy will cost Mr Williams substantially more than a term or whole life policy and will earn Randy more commission . Randy has violated ? a) The principle of objectivity b) The...
-
Oil, with density of 950 kg/m and viscosity of 0.019 kg/ms, flows through a 30-cm-diameter commercial steel pipe 250 m long with a head loss of 15 m. Find the mass flow rate. Hint: Do NOT use...
-
1 What is the weight on Earth (in newtons) of a man with a mass of 64 kg? (use g = 10 m/s)
-
You have just purchased a home and taken out a $510,000 mortgage. The mortgage has a 30-year term with monthly payments and an APR (with semi-annual compounding) of 5.28%. (Note: Be careful not to...
-
a) You have written a call option on 1 share of A Street stock that is worth $15. You expect the price of the stock to either move to $20 or $10 over the next year. How many shares of A Street stock...
-
A block of mass 1 . 7 9 kg is placed on a frictionless floor and initially pushed northward, whereupon it begins sliding with a constant speed of 5 . 5 8 m / s . It eventually collides with a second,...
-
Why did the layered OS not succeed in the real world? a . Because its performance was not very high b . Because it was difficult to identify the layers c . Because it was unstable d . Because it was...
-
The Place-Plus real estate development firm in Problem 24 is dissatisfied with the economists estimate of the probabilities of future interest rate movement, so it is considering having a financial...
-
As a project manager in a development activity for a new range of computer software, discuss how uncertainty may be handled.
-
What are the implications for a project manager of not having any clear prioritization of objectives in terms of time, cost and quality?
-
What is quality?
-
Preventing a user who approves a configuration change from being the person who implements the change is an example of which of the following? A. Rotation of duties B. Least privilege C. Segregation...
-
A onedimensional heat conduction problem can be expressed by the following differential equation: where \(k\) is the thermal conductivity, \(T(x)\) is the temperature, and \(Q\) is heat generated per...
-
Consider a simply supported beam of length \(L\) subjected to a uniformly distributed transverse load \(p(x)=p_{0}\). Use the Rayleigh-Ritz method to determine the transverse deflection \(v(x)\) of...
Study smarter with the SolutionInn App