Question
3. You are considering opening another restaurant in the Pizza chain. The new restaurant will have annual revenue of $200,000 and operating expenses of $80,000.
3. You are considering opening another restaurant in the Pizza chain. The new restaurant will have annual revenue of $200,000 and operating expenses of $80,000. Th e annual depreciation and amortization for the assets used in the restaurant will equal $20,000. An annual capital expenditure of $10,000 will be required to offset wear and tear on the assets used in the restaurant, but no additions to working capital will be required. Th e marginal tax rate will be 30 percent. Calculate the incremental annual after-tax free cash flow for the project. (3 Marks)
4. The XXX Co. currently has debt with a market value of $300 million outstanding. The debt consists of Bank loan with 4.5% refinancing interest rate. The firm also has an issue of 2 million preferred shares outstanding with a market price of $11.00 per share. The preferred shares pay an annual dividend of $1.10. Imaginary also has 14 million shares of common stock outstanding with a price of $25.00 per share. The firm is expected to pay a $3 common dividend one year from today, and that dividend is expected to increase by 5 percent per year forever. If Imaginary is subject to a 40 percent marginal tax rate, then what is the firms weighted average cost of capital? (3 Marks)
5. Since venture capital only invest in startup business, very high-risk investments, explain how venture capital minimize their level of risk? (3 Marks)
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