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The Ronald Replica Co Ltd (RRL) is contemplating a $30 million national duplication of its replica division. It has forecast after-tax cash flows for the project of $15 million per year in perpetuity. The cost of debt capital for RRL is 8 per cent, and its cost of equity capital is 15 per cent. The tax rate is 30 per cent. Harry Hardly, the company’s chief financial officer, has come up with two financial options: 1) A $30 million issue of 15-year debt at 8 per cent interest. The issue costs would be 1 per cent of the amount raised. 2) A $30 million issue of ordinary shares. The issue costs would be 10 per cent of the amount raised. The target debt/equity ratio of RRL is 0.8. The expansion project will have about the same risk as the existing business. a. What is the NPV of the new project at the target debt/equity ratio? b. Mr. Hardly has advised the company to go ahead with the new project and to use the debt because debt is cheaper and the issue cost will be less with debt. Is Mr. Hardly correct?
A company is planning to manufacture snowboards. The fixed costs are $100 per day and total cost are $5700 per day at a daily output of 20 boards. Assuming that the total cost per day, c(X), is linearly related to the total output per day, x, write a..
Calculate risky portfolio (with stock and bond fund) return and standard deviation under different weights (0.1 increment).
What ex-dividend price per share will now make you indifferent between the two trading strategies?
In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Party Supply.
What should be the average beta of the new stocks added to the portfolio?
John plans to buy a vacation home in 8 years from now and wants to have saved $57965 for a down payment. how much money should he place today in a saving account that earns 4.63 % per year (compound daily) to accumulate money for his down payment?
How is a firm’s fundamental value related to its free cash flows and its cost of capital? Use Equation 1-1 from Financial Management: Theory and Practice to compare maximizing the firm’s value to other possible management objectives, such as maximizi..
You did some additional research, and also found the following values for each stock’s beta coefficient: What type of risk are we now considering? What is the current Market Risk Premium? What is the required return for each stock suggested by CAPM?
what is the expected return on the shares of the law firm according to the CAPM?
Calculate the values of call and put options on the following stock:
What is the expected profit of granting credit? What is the break-even probability of collection?
Explain the benefits to importers and exporters of using a letter of credit and a bank-accepted draft in an international trade transaction.
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