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An entrepreneur that would like to create a new firm that specializes in electric cars. Your plan is to fund this new business by selling ownership in the business. That is, your firm will be all equity - you have no intention of issuing any debt.
In order to sell equity in this new business, you will need to calculate the fair value of this business, which involves determining the proper discount rate for electric car cash flows. Fortunately, there is one publicly traded electric car company (symbol: BOLT) you can use for comparison. However, this firm has a substantial amount of debt, which makes any comparison a little more complicated. You run a regression of BOLT excess stock returns on excess market returns and obtain an equity beta of 2.5. Additional research informs you that the market capitalization (i.e. market value of equity) for BOLT is $600M, the value of debt is $400M (which was issued at par and will remain constant), and the beta of BOLT debt is 0.1. Assume a risk-free rate of 3 percent and a market risk premium of 6 percent. a) What is the expected return on assets for BOLT? Your business partner informs you that the expected return on assets you calculated in (a) is not quite the discount rate we should use for our electric car cash flows. The reason is that BOLT is a levered firm, and therefore the expected return on assets for BOLT includes both its electric car cash flows and tax shield cash flows. Specifically (note that OA stands for "operating assets" and TS"stands for "tax shield"): ErA=( VOA * ErOA)/(VOA+VTS) + (VTS * ErTS)/ (VOA+VTS) Because we are an all-equity firm, the proper discount rate to apply to our electric car cash flows would be the expected return on operating assets for BOLT. Assume a tax rate of 40 percent for the remainder of this problem. b) What is the value of the tax shield for BOLT? Assume that the expected return on BOLT tax shields is the same as the BOLT expected return on debt. Also keep in mind that the value of debt plus value of equity is equal to the value of operating assets plus value of tax shield (as both sums equal the value of the firm). c) Calculate the expected return on operating assets using the expected return equation above. d) Your firm expects to produce free cash flows of either $30M or $60M in perpetuity, with equal probability. How much money would you get if you sold 40 percent ownership in your firm?
If she pays off the loan in 36 months, what are her monthly payments? If she makes a down payment of $220, how much will her monthly payments be? Do not round until the final answer. Then, round to the nearest cent.
there are three types of short-term bank loans.nbsp explain how each is used by people or businesses. do not cut and
You have made a decision that you need to start a savings program to fund that future college education. How much will you have in the savings fund when Jessica is ready to enter college in 18 years?
in march 2010 hertz pain relievers bought a message machine that provided a return of 8 percent. it was financed by
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equity financing and debt financingexplain using examples the differences between equity financing and debt
Permanent working capital required at outset, to be restored to cash at the end of the project's life $ 50,000.
Build It Better Products has come out with a new and improved product. As a result, the firm projects an ROE of 18%, and it will maintain a plowback ratio of 0.40. It's earnings this year will be $2 per share. Investors expect a 12% rate of return..
What is the price of 1.8 million ounces of gold produced in seven years? (Enter your answer in billions rounded to 2 decimal places.)
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Careful measurement of the electric field at the surface of a black box indicates that the net outward flux through the surface of the box is 8.0 × 103 N m2/C.
The old press was purchased 2 years ago for an installed cost of $35,000 and can be sold for $20,000 net of any removal costs today. Both presses are depreciated under the MACRS 5-year recovery schedule. The firm is in 40 percent marginal tax rate..
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