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Orange, Inc. is a well-known designer and manufacturer of cell phones, computers, tablets and their associated software and operating systems. Suppose that Orange, Inc. is financed with 100% equity and has a market value of $423 billion. Suppose also that Orange has a WACC of 7%. Investment bankers have approached Orange's CFO and proposed that "Orange take advantage of historically low debt rates" by issuing bonds with a market value of $100 billion and using the proceeds to re-purchase $100 billion in equity from shareholders. Suppose that due to Orange's large free cash flows the bonds would be almost risk free and have a beta of 0.1. Assume that the market risk premium is 5% and the risk free rate is 2%. The investment bankers have used the WACC formula to argue that including debt in Orange's capital structure will "lower its overall cost of capital" from 7% to 5.9% because Orange can issue (almost) risk free debt. This debt, they argue, is much cheaper than equity. That is, their calculation of the ‘new' WACC is:
[The bankers correctly note that while Orange is extremely profitable, its effective tax rate in the U.S. (the relevant jurisdiction) is zero due to a variety of initiatives that the company has taken to shield its income from taxation and therefore does not impact the WACC]. Are the bankers correct that Orange can lower its cost of capital by replacing $100B in equity with $100B in bonds? Please use the WACC formula as the basis of your answer.
McKinnley Company is constructing a plan to finance its asset base. The firm has $5,000,000 in current assets, of which 20 percent are permanent, and $12,000,000 in fixed assets.
The stock of North American Dandruff Company is currently selling at $80 per share. The firm pays a dividend of $2.50 per share.
Equipment was purchased for $45,000, plus $2,000 in freight charges.Installation costs were 1,500 and sales tax is totalled$1,000. Hiring a special consultant of the eqipment costs 3,000. What is the assets depreciable basis?
In some cases for equity valuation, Price Earnings ratios are not available, for example, with internet startups with no earnings, or with negative earnings.
Under what conditions might larger balances in inventory and accounts receivable not help the firm to run more smoothly and efficiently.
Deer Valley Lodge, a ski resort in the Wasatch Mountains of Utah, has plans to eventually add 5 new chairlifts. Suppose that one lift costs $2 million, and creating the slope and installing the lift costs another $1.3 million.
Asset B will have a useful life of 6 years and cost $1.3 million; it will have installation costs of $180,000 and a salvage or residual value of $300,000. Which asset will have a greater annual straight-line depreciation?
After a 5-for-1 stock split, Strasburg Co paid a dividend of $0.75 per new share which represents a 9% increase over last years presplit dividend. What was last years dividend per share?
From the diversity point of view, what do you need to know about your targeted learners and the training requirements needed prior to taking assignment in a foreign country.
If the aftertax expected returns on two stocks are equal (because they are in the same risk class), what is the pretax required return on Gordons stock?
what is the companys cost of equity? Round your answer to 2 decimal places.
They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value.
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