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A firm has perpetual constant FCFs, 10 million shares outstanding trading at $50 per share, and debt of $200 million. The current equity beta is 1.5, risk free rate is 8%, MRP is 5.5%, cost of debt is 11%, and tax rate is 46%. It is considering adding $100 million of debt, which would push its cost of debt to 12.5%.
a) Would you recommend this change?
b) If the debt actually increases (keeping operating cash flows unchanged), what would be the change in firm value? Assuming that all of this change flows into equity value, what would be the change in price per share?
c) Assume that the firm has a project that requires $100 initial investment (funded via an increase in debt, as above), that will create incremental before-tax cash flows of $20 million per year (same risk as existing projects), forever. Should the firm undertake it? What if the cash flows from the project are risk free?
Calculate both the NPV (at 12 %) and IRR for each design and then confirm the amounts provided by the accountant and the bookkeeper
What is the return on equity when financial leverage is and is not utilized?
Conway will depreciate the machine t zero dollars salvage value according to the following schedule: 40% first year, 40% second year, and 20% third year, and expected no resale value for the machine at the end of its 3 year operating life. Conway'..
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a firm wishes to maintain an internal growth rate of 7 and a dividend payout ratio of 25. the current profit margin
The purpose of this assignment is to allow the student to calculate the project cash flow using net present value (NPV), internal rate of return (IRR), and the payback methods.
Find the all-in cost of a swap to a party that has agreed to borrow $5 million at 5 percent externally and pays LIBOR + .5 percent on a notational principal of $5 million in exchange for fixed rate payments of 6 percent. show work please.
A one-year U.S. Treasury security has a nominal interest rate of 2.25 percent. If the expected real rate of interest is 1.5 percent, what is the expected annual inflation rate.
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