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After reading all about the tax advantages of having a high leverage ratio, the CEO of WMart is considering a leveraged recapitalization and wants to know the value of his firm subsequent to the recap. The firm currently has $27 million in assets and $12 million in debt and is interested in taking on an additional $6.1 million in debt. WMart's debt yields 8% and is expected to the new debt level in perpetuity. WMart is expected to produce unlevered cash flows next year of $5.3 million per year, growing at 3% annually.
WMart's closest competitor, a pure-play firm in the same business as WMart, has a debt-to-equity ratio of 0.5 and an equity beta of 1.25. Ten-year treasuries currently yield 2.3% and the expected return on the S&P 500 is 10.0% per annum. The marginal corporate tax rate is 40%.
Using the information above regarding WMart and if you discount the interest tax shields at the unlevered cost of equity, what is the value of the enterprise (market value of assets) using the APV method? Enter your response in millions, rounded to two decimal places.
Suppose you invest $ 2,026 today to start a business. In 4 years you hope to sell this company for $ 8,865. What would be your annualized rate of return? Assume that, starting next year, you put $ 662 into a savings account that pays 9 % interest eve..
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The distribution of a firm's capital between debt and equity is its
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Green Landscaping, Inc. is using net present value (NPV) when evaluating projects. Green Landscaping’s cost of capital is 8.45 percent. What is the NPV of a project if the initial costs are $1,742,890 and the project life is estimated as 12 years? Th..
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You are considering two mutually exclusive projects. Project A has cash flows of -$125,000, $51,400, $52,900, and $63,300 for years 0 to 3, respectively. Should you accept or reject these projects based on IRR analysis?
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