10 A Convert to SmartArt t Picture Shapes Tee Box Arance Shy * AVAA -- ABC Co is considering buying a new machine to expand its current operations. The purchase price of the new machine is 48 million. The machine has a three-year life, will be fully depreciated (using straight-line method) to zero by the end of its life and is expected to have a salvage value of 6.8 million in year 0, it will require an increase in inventories of 12 million, which will be fully recovered at the end of the project. In years 1-3, this machine will increase the firm's annual sales by 16 million and its annual operating costs by 8 million. The company's marginal and average tax rate is 30%. The company pans to maintain its current capital structure and finance the project using 40% debt and 60% equity. The firm's cost of debt and 4% and its cost of equity is 9.8%. Estimate CFs and determine the new machine's NPV. Should the firm purchase this machine? ABC operates in two industries: 75% of its assets are in the retail and 25% in the financial services. The market value of its equity is 200 million and the market value of debt is 50 million The average regression beta of retail firms is 1.5 and their debt to equity ratio is 20%; The average regression beta of financial firms is 1.2 and their debt to equity ratio is 30%. The statutory marginal tax rate is 40%. The riskfree rate is 1% and the market risk premium is 5%. a) Estimate the firm's current cost of equity b) What will be the firm's new cost of equity if it is borrows an additional 150 million and uses the proceeds to expand its financial services segment? 10 A Convert to SmartArt t Picture Shapes Tee Box Arance Shy * AVAA -- ABC Co is considering buying a new machine to expand its current operations. The purchase price of the new machine is 48 million. The machine has a three-year life, will be fully depreciated (using straight-line method) to zero by the end of its life and is expected to have a salvage value of 6.8 million in year 0, it will require an increase in inventories of 12 million, which will be fully recovered at the end of the project. In years 1-3, this machine will increase the firm's annual sales by 16 million and its annual operating costs by 8 million. The company's marginal and average tax rate is 30%. The company pans to maintain its current capital structure and finance the project using 40% debt and 60% equity. The firm's cost of debt and 4% and its cost of equity is 9.8%. Estimate CFs and determine the new machine's NPV. Should the firm purchase this machine? ABC operates in two industries: 75% of its assets are in the retail and 25% in the financial services. The market value of its equity is 200 million and the market value of debt is 50 million The average regression beta of retail firms is 1.5 and their debt to equity ratio is 20%; The average regression beta of financial firms is 1.2 and their debt to equity ratio is 30%. The statutory marginal tax rate is 40%. The riskfree rate is 1% and the market risk premium is 5%. a) Estimate the firm's current cost of equity b) What will be the firm's new cost of equity if it is borrows an additional 150 million and uses the proceeds to expand its financial services segment