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Benson, Athavale & Kemper (BAK) started a manufacturing facility in the last century. This firm, profitable since inception produces steering units for the automotive industry. The 3 founders have been averse to debt. Presently, BAK has 20 million shares outstanding trading at $ 25. The CFO Dawn Strong is looking at a proposal to buyout a competitor for $ 100 million. The entrepreneurs expect pre-tax earnings to increase by $ 20 million in perpetuity. Dawn computes the cost of capital to be 10%. She is a recent graduate from a MBA program and knows that some debt will increase the value of the firm and she plans to evaluate this project by borrowing the required funds. Dawn finds out that the firm can sell 30 year AAA bonds with a 6% coupon. She opines that the firm with a capital structure around 25% debt will help increase its value and not worry the shareholders or the financial markets. The firm is in the 40% tax bracket. 1. Should BAK accept the project? With debt or with sale of shares? Explain?
Mahjong, Inc., has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$36,900 –$36,900 1 19,260 6,760 2 14,760 13,260 3 12,260 19,760 4 9,260 23,760. If the required return is 15 percent, what is the NPV for..
Bruner Aeronautics has perpetual preferred stock outstanding with a par value of $100. The stock pays a quarterly dividend of $3, and its current price is $123. What is its nominal annual rate of return?
A truck costs $35,000 with a residual value of $2,000. Its service life is five years. Using the declining-balance method at twice the straight-line rate, the book value at the end of year 2 is...
You open a brokerage account on January 1 and sell short 500 shares of Apple Computer at $163.39 per share. The initial margin requirement is 50%. Assume that Apple pays an annual dividend on December 31 of $5.50 per share, the price of the stock is ..
A company currently pays a dividend of $1.75 per share (D0 = $1.75). It is estimated that the company's dividend will grow at a rate of 17% per year for the next 2 years, and then at a constant rate of 8% thereafter. The company's stock has a beta of..
Complete the Integration exercise of HANDY HAND TOWELS - Assignment is a reflection of the tutorial work you should have completed during your tutorials.
Champion Bakers uses specialized ovens to bake its bread. One oven costs $860,000 and lasts about 3 years before it needs to be replaced. The annual operating cost per oven is $10,000. What is the equivalent annual cost of an oven if the required rat..
What is the value of firm L according to MM's proposition 1 with corporate taxes and micky is the holder of $30,000 worth of L's stock. What rate of return can he expect, assuming a dividend payout of 100%.
An investment project costs $10,000 and has annual cash flows of $2,950 for six years. What is the discounted payback period if the discount rate is zero percent? Discounted payback period years What is the discounted payback period if the discount r..
Suppose you know that a company’s stock currently sells for $60 per share and the required return on the stock is 10 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it..
A firm that follows a residual dividend policy will probably have:
STEPHENSON REAL ESTATE RECAPITALIZATION Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. The company has..
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