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 7QP
Summary Introduction
To Determine: The
Introduction: A Net Present Value (NPV) is a tool used to calculate the present value of expected cash flow of an investment minus the total cost of purchasing the investment.
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TechnoLink Berhad is currently an unlevered
firm with a weighted average cost of capital
(WACC) of 25 percent. The earnings before
interest and taxes is forecasted to remain at
RM80,000.00 annually. The firm wishes to
invest in a new project which requires them to
borrow RM50,000.00 from a local bank that
charges 14 percent interest per annum. The
current tax rate for the company is 24
percent.
REQUIRED: Calculate the following:
i. value of the firm without debt
ii. value of the firm with debt
iii. value of equity after market capitalisation
iv. cost of equity after market capitalisation
v. weighted average cost of capital (WACC)
after market capitalisation
TechnoLink Berhad is currently an unlevered
firm with a weighted average cost of capital
(WACC) of 25 percent. The earnings before
interest and taxes is forecasted to remain at
RM80,000.00 annually. The firm wishes to
invest in a new project which requires them
borrow RM50,000.00 from a local bank that
charges 14 percent interest per annum. The
current tax rate for the company is 24 percer
REQUIRED: Calculate the following:
i. value of the firm without debt
ii. value of the firm with debt
iii. value of equity after market capitalisation
iv. cost of equity after market capitalisation
V. weighted average cost of capital (WACC)
after market capitalisation
Adamson Corporation is considering four average-risk projects with the following costs and rates of return:
Expected Rate of Return
TE
Project
Cost
1
$2,000
16.00%
2
3,000
15.00
5,000
13.75
4
2,000
12.50
The company estimates that it can issue debt at a rate of ra = 9%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $7.00 per year at $56.00 per
share. Also, its common stock currently sells for $41.00 per share; the next expected dividend, D1, is $4.25; and the dividend is expected to grow at a constant rate of 6% per year.
The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.
a. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places.
Cost of debt:
%
Cost of preferred stock:
%
Cost of retained earnings:
%
b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places.
%
c. Only projects…
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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