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

  

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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. 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. 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. 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. 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. 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. 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.

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