Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 18, Problem 13QP
a.
Summary Introduction
To determine: The NPV of the Project.
Introduction: A
b.
Summary Introduction
To determine: The cost of capital for the new project if the equipment purchased fully with debt.
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First and Ten Corporation’s stock returns have a covariance with the market portfolio of .0506. The standard deviation of the returns on the market portfolio is 23 percent and the expected market risk premium is 6.5 percent. The company has bonds outstanding with a total market value of $56.8 million and a yield to maturity of 6.8 percent. The company also has 6 million shares of common stock outstanding, each selling for $33. The company’s CEO considers the firm’s current debt-equity ratio optimal. The corporate tax rate is 23 percent and Treasury bills currently yield 4.4 percent. The company is considering the purchase of additional equipment that would cost $58 million. The expected unlevered cash flows from the equipment are $19.1 million per year for 5 years. Purchasing the equipment will not change the risk level of the firm.
Calculate the NPV of the project.
Very much struggling with setting this up and solving this problem.
Examine the following book-value balance sheet for University Products Incorporated. The preferred stock currently
sells for $15 per share and pays a dividend of $3 a share. The common stock sells for $16 per share and has a beta of
0.9. There are 2 million common shares outstanding. The market risk premium is 9%, the risk-free rate is 5%, and the
firm's tax rate is 21%.
Assets
Cash and short-term securities
Accounts receivable
Inventories
Plant and equipment.
Total
$2.0
3.0
7.0
21.0
$ 33.0
a. Market debt-to-value ratio
b. WACC
BOOK VALUE BALANCE SHEET
(Figures in $ millions)
Liabilities and Net Worth
Bonds, coupon = 6%, paid annually (maturity = 10 years, current.
yield to maturity = 8%)
Preferred stock (par value $15 per share)
Common stock (par value $0.20)
Additional paid-in stockholders' equity
Retained earnings
Total
a. What is the market debt-to-value ratio of the firm?
b. What is University's WACC?
Note: For all the requirements, do not round intermediate calculations. Enter…
First and Ten Corporation’s stock returns have a covariance with the market portfolio of .0501. The standard deviation of the returns on the market portfolio is 22 percent and the expected market risk premium is 6.6 percent. The company has bonds outstanding with a total market value of $56.7 million and a yield to maturity of 6.9 percent. The company also has 5.9 million shares of common stock outstanding, each selling for $34. The company’s CEO considers the firm’s current debt-equity ratio optimal. The corporate tax rate is 22 percent and Treasury bills currently yield 4.3 percent. The company is considering the purchase of additional equipment that would cost $57.5 million. The expected unlevered cash flows from the equipment are $18.95 million per year for 5 years. Purchasing the equipment will not change the risk level of the firm.
Calculate the NPV of the project.
Chapter 18 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 18 - APV How is the APV of a project calculated?Ch. 18 - WACC and APV What is the main difference between...Ch. 18 - FTE What is the main difference between the FTE...Ch. 18 - Prob. 4CQCh. 18 - Prob. 5CQCh. 18 - NPV and APV Zoso is a rental car company that is...Ch. 18 - APV Gemini, Inc., an all-equity firm, is...Ch. 18 - Prob. 3QPCh. 18 - Prob. 4QPCh. 18 - Prob. 5QP
Ch. 18 - Prob. 6QPCh. 18 - Prob. 7QPCh. 18 - WACC National Electric Company (NEC) is...Ch. 18 - WACC Bolero, Inc., has compiled the following...Ch. 18 - Prob. 10QPCh. 18 - Prob. 11QPCh. 18 - APV MVP, Inc., has produced rodeo supplies for...Ch. 18 - Prob. 13QPCh. 18 - Prob. 14QPCh. 18 - Prob. 15QPCh. 18 - Prob. 16QPCh. 18 - Prob. 17QPCh. 18 - Prob. 18QPCh. 18 - Prob. 1MC
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