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There are two firms, Hello and olleH. Each has expected Net Operating Income (NOI) of $18 million each year forever, and the cash flow to Hello will always be exactly the same as that to olleH, whether it ends up above or below the expected amount. Hello is all equity (stock). olleH has some equity, along with $100 million in debt (market value and face value). olleH’s debt pays 5% interest at the end of each year, and olleH has expected return on its equity of 6.5%. There are no taxes, and the rest of the Modigliani-Miller assumptions hold.
a. What is the expected cash flow to Hello equity holders each year?
b. What is the value of Hello equity?
c. What is the value of Hello equity?
d. What is the expected return on Hello stock?
However, the underwriter would charge flotation costs of $3.68 per share. What is the form’s cost of preferred stock financing?
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A bakery decides to buy an oven. This oven will cost $7000 and is expected to last for 15 years. Annual operation and maintenance costs for the oven is 350 dollars per year and the salvage value for this type of oven is usually 4% of the original cap..
At the end of ten years, the investment will be sold for salvage of $250,000. What is the NPV at a 10% cost of capital?
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