Should bmm purchase the equipment

Reference no: EM133264802

Question: BMM Co. shares have a required rate of return of 12%. BMM bonds carry an 8.00% coupon rate and a yield-to-maturity of 7.00%. The market value of the bonds is $400 million. BMM stock, of which 40 million shares are outstanding, sells for $15 per share. The Corporate tax rate is very favourable at a low rate of 20%. No preferred shares are outstanding.

BMM must decide whether or not to purchanse additional capital equipment. The cost of the equipment is $20 million. The expected after-tax net cash flows from the new equipment are $3 million a year for the first 5 years and $2.5 million a year for another five more years. the salvage value is zero. Should BMM purchase the equipment?

Reference no: EM133264802

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