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You are considering introducing a new Tex-Mex Thai fusion restaurant. The initial outlay on this new restaurant is $6.9 million and the present value of the free cash flows (excluding the initial outlay) is $4.9 million, such that the project has a negative expected NPV of $2.0 million. Looking closer, you find that there is a 50 percent chance that this new restaurant will be well received and will produce annual cash flows of $818,000 per year forever (a perpetuity), whereas there is a 50 percent chance of it producing a cash flow of only $191,000 per year forever (a perpetuity) if it isn’t received well. The required rate of return you use to discount the project cash flows is 10.2 percent. However, if the new restaurant is successful, you will be able to build 10 more of them and they will have costs and cash flows similar to the successful restaurant’s costs and cash flows.
a. In spite of the fact that the first restaurant has a negative NPV, should you build it anyway? Why or why not?
b. What is the expected NPV for this project if only one restaurant is built but isn’t well received? What is the expected NPV for this project if 10 more are built after one year and are well received? (ignore the fact that there would be a time delay in building additional restaurants.)
LKD Co. has 11 percent coupon bonds with a YTM of 9.5 percent. The current yield on these bonds is 9.9 percent. How many years do these bonds have left until they mature?
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Assume that Firms U and L are in the same risk class and that both have EBIT = $500,000. Firm U uses no debt financing, and its cost of equity is rsu = 14%. Firm L has $1 million of debt outstanding at a cost rd =8%.
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Ryan Inc is expected to have its growth rate drop from 20% to 10% in 5 years. The last dividend was $3 and the discount rate is based on beta of 3, T bond rate of 5% and return of the market of 10%. First, find the value of Ryan Inc. Second, compute ..
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What will be the total deduction for social security and Medicare taxes on Rony's next semi monthly pay check of $3,960, if she has already earned $42,560 this year? (Social security tax is 6.2% of gross wages up to $106,800. Medicare tax is 1.45% of..
Dharma Supply has earnings before interest and taxes (EBIT) of $527000, interest expenses of $334000 bad faces a corporate tax rate of 35 percent. What is Dharma Supply's Net Income? what would dharma’s net income be if it didn’t have any debt? what ..
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