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Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .48, but the industry target debt-equity ratio is .38 The industry average beta is 1.1. The market risk premium is 8 percent, and the risk-free rate is 5.7 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 55 percent. The project requires an initial outlay of $485,000 and is expected to result in a $90,000 cash inflow at the end of the first year. The project will be financed at Blue Angel's target debt-equity ratio. Annual cash flows from the project will grow at a constant rate of 5.7 percent until the end of the fifth year and remain constant forever thereafter.
(a) Calculate net present value.
(b) Should Blue Angel invest in the project?
Crypton Electronics has a capital structure consisting of 45% common stock and 55% debt. A debt issue of $1,000 par value, 6.2% bonds that mature in 15 years and pay annual interest will sell for $978.
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A 6.5% coupon bond with 25 years left to maturity is priced to offer a 4.5% yield to maturity. You believe that in three years, the yield to maturity will be 12%. If this occurs, what would be the total return of the bond in dollars
Jane Smith is in the 40% personal tax bracket. She is considering investing in ABC bonds that carry a 12% interest rate or tax exempt XYZ bonds that have a 6% interest rate.
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