Reference no: EM131215658
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 of rd = 8%. There are no taxes. Assume that the MM assumptions hold.
value of firm(v): Firm U = $3,571,429 // Firm L = $3,571,428
value of equity(s): Firm U = $3,571,429 // Firm L = $2,571,429
levered cost of equity(rsl) = 16.33%
WACC = 14%
1. Suppose that Firms U and L are growing at a constant rate of 7% and that the investment in net operating assets required to support this growth is 10% of EBIT.
a. Use the compressed adjusted present value (APV) model to estimate the value of U and L.
b. Also estimate the levered cost of equity and the weighted average cost of capital.
|
Regarding ethical issues accompanying budgeting
: Which of the following statements is true regarding ethical issues accompanying budgeting?
|
|
Debt service fund for the years
: The City of Spartan's fiscal year ends on December 31. On October 1, 2017, the city issued $1,000,000 of 6%, 10-year term bonds with semi-annual interest payments due on March 1 and October 1 each year, beginning on April 1, 2018. What amount of expe..
|
|
Lock division refuses outside price and cabinet division
: Lock Division of Morgantown Corp. sells 80,000 units of part Z-25 to the outside market. Part Z-25 sells for $40, has a variable cost of $22, and a fixed cost per unit of $10. The Lock Division has a capacity to produce 100,000 units per period. What..
|
|
Describe instances where cash based transactions
: Without incriminating yourself, please describe instances where "Cash Based" transactions could happen in our local economy or even nationally. Then offer a suggestion for the government, if one is available but if not justify why not, to capture tax..
|
|
Use compressed adjusted present value model
: 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 of rd = 8%. There are no taxes. Assume t..
|
|
Find the internal rate of return promised by the new machine
: Wendell’s Donut Shoppe is investigating the purchase of a new $52,100 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,100 per year. what would the total annual cash..
|
|
Annual statements for the use of management
: Federal income tax returns of an officer of the corporation to determine whether he or she has included all taxable income in his or her return. Financial statements for use by stockholders when there is an internal audit staff. A bond indenture agre..
|
|
Prepare the intangible assets section of the balance sheet
: The intangible assets section of Sappelt Company at December 31, 2015, is presented below. The patent was acquired in January 2015 and has a useful life of 10 years. The franchise was acquired in January 2012 and also has a useful life of 10 years. P..
|
|
Why is the timing of revenue recognition important
: In order for revenue to be recognized, Why is the timing of revenue recognition important? If the criteria to use the percentage of completion method are not met, a company must. Joint discussions between the FASB and IASB regarding accounting for re..
|