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Suppose ABC Company is considering opening another office. The expansion will cost $50K and is expected to generate after-tax cash flows of $10K per year in perpetuity. The firm has a target debt/equity ratio of .5. New equity has a flotation cost of 10% and a required return of 15%, while new debt has a flotation cost of 5% and a required return of 10%. The tax rate is 34%. What is the firm’s cost of capital? What is the firm’s flotation cost? What is the amount that ABC will have to raise, given flotation costs, to finance its $50K investment? What is the NPV of this investment?
You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12.6 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected..
Books Inc. recently reported $3 million of net income. The difference between EBIT and taxable income must be interest expense.
A company has just paid a quarterly dividend of $1.50 per share, which is expected to increase 1% every quarter into the future. The future dividends are an example of which type of cash flow stream? A municipal bond yields 5.1 percent. What is the t..
An investor puts up 5000$ but borrows an equal amount of money from his broker to double the amount invested to $10,000. The broker charges 7% on the loan. The stock was originally purchased at $25 per share, and in 1 year the investor sells the stoc..
Provide the following journal entries at December 31, 2015 (year-end): Morgan Company paid accumulated costs for a trademark on March 10, 2014 on the books recorded as an intangible asset of $180,000. At December 31, 2014, the company assessed the va..
The Delta Fish Hatchery factors its accounts receivables immediately at a discount rate of 1.8 percent. The average collection period is 39 days. Assume all accounts are collected in full. What is the effective annual interest rate on this arrangemen..
Using expectations theory and geometric averages, forecast the yields on the following securities:
A business executive once stated, “Depreciation is one of our biggest operating cash inflows.” Do you agree? Explain.
how much will you be able to borrow for a new car?.
The firm has 576 shares of common stock outstanding that sell for $4.00 per share. Calculate Pawlson WACC using market-value weights.
KADS, Inc., has spent $390,000 on research to develop a new computer game. The firm is planning to spend $190,000 on a machine to produce the new game. The firm has a tax rate of 40 percent, an opportunity cost of capital of 13 percent, and it expect..
Farmco is in the agricultural industry and has five branches located in Saskatchewan. Farmco's year end is June 30. Farmco is well established and has been profitable for many years. Identify four specific factors that would either increase or decrea..
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