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EZ-lumber is considering an investment of $40 million in plant and machinery. This is expected to produce free cash flows of $13 million in year 1, $14 million in year 2, $15 million in year 3, and 25 million in year 4. The tax rate is 35%. You don’t know the target capital structure, but you do have the following information:
• Bonds: The target capital structure has $36,000,000 in debt. The firm’s existing bonds have a face value of $1000, a coupon rate of 5.5% with coupons paid annually, 8 years to maturity and a price of 967.
• Retained Earnings (Internal Equity): There are 1,000,000 shares outstanding with a price of $60 per share. The beta on the stock is 1.25. The risk-free rate is 2.5% and the market risk premium is 6%.
Find the internal rate of return (IRR) for the project. Using the WACC and IRR, should they invest? Why or why not?
A project has an initial requirement of $229,025 for new equipment and $9,004 for net working capital. The fixed assets will be depreciated to a zero book value over the 3-year life of the project and have an estimated salvage value of $82,095. All o..
Complimentary effects may have no change in cash flow, or else will ____ cash flow. Cannibalization effects may also have no change in cash flow, or else will _____ cash flow.
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In the case study, Warren E. Bufett, 2005, how well did Berkshire Hathaway performed? How well has it performed in the aggregate? What about its investment in MidAmerican Energy Holdings?
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The rate of return on Cherry Jalopies, Inc., stock over the last five years was 19 percent, 11 percent, -7 percent, 6 percent, and 9 percent. Over the same period, the return on Straw Construction Company’s stock was 16 percent, 20 percent, -3 percen..
After deciding you want a new car, you can either lease the car or purchase it with a two-year loan. The car you want costs $36,000. The dealer has a special leasing arrangement where you pay $101 today and $501 per month for the next two years. What..
Today you will deposit $1,000 into a savings account that pays 8%. - If the bank compounds interest annually, how much will you have in your account on January 1, 2012?
Hook Industries' capital structure consists solely of debt and common equity. It can issue debt at rd = 8%, and its common stock currently pays a $3.00 dividend per share (D0 = $3.00). The stock's price is currently $26.00, its dividend is expected t..
What interest payments do bondholders receive each year? - At what price does the bond sell? - What will happen to the bond price if the yield to maturity falls to 6.3%?
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