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Assignment # 2 Consider the following statement by a financial manager: Since we are financing our new manufacturing facility 1 0 0 % with equity,
Assignment #
Consider the following statement by a financial manager: "Since we are financing our new manufacturing facility with equity, we must evaluate it using a higher rate of return than we would if we financed a portion of the facility with debt." Do you agree? Why or why not? Be sure to fully explain the rationale behind your argument. Marks
Based on market values, Gubler's Gym has an equity multiplier of times. Shareholders require a return of percent on the company's stock and a pretax return of percent on the company's debt. The company is evaluating a new project that has the same risk as the company itself. The project will generate annual aftertax cash flows of $ per year for years. The tax rate is percent. What is the most the company would be willing to spend today on the project? Marks
The required return on the stock of Moe's Pizza is percent and aftertax required return on the company's debt is percent. The company's market value capital structure consists of percent equity. The company is considering a new project that is less risky than current operations and it feels the risk adjustment factor is percent. The tax rate is percent. What is the required return for the new project? Marks
BOE Enterprises has bonds outstanding that have a coupon rate and a $ par value. The bonds are selling at a quoted price of pay interest semiannually, and mature in years. There are shares of percent $ par value preferred stock outstanding with a current market price of $ a share. In addition, there are million shares of common stock outstanding with a market price of $ a share and a beta of These shares were originally sold for $ each. The common shareholders received a dividend of $ per share last year. Based on the last years growth, the company estimates a growth rate in dividends of forever. The firm's marginal tax rate is
BOE Enterprises is considering a major expansion that would cost $ million for the purchase of new capital equipment. The project is expected to provide cash flows before tax of $ million per year for years. At the end of years the machine can be salvaged for $ million. The machine belongs to asset class with a CCA rate of Assume the class will stay open at the end of the project.
Flotation cost to issue new preferred share is new debt is and new common share is The company considers the current capital structure to be optimal and the risk associated with the expansion is considered to be the same as the company on average. Marks
a Calculate the aftertax cost of debt. Use approximation formula and ignore the compounding. Show your work. marks
b Calculate the cost of preferred shares. marks
c Calculate the cost of equity. marks
d Calculate the market value capital structure for the firm. marks
e Calculate the after tax weighted average cost of capital WACC using the market value weighting for the firm. marks
f Calculate the weighted average flotation costs. marks
g Calculate the initial investment adjusted for the expansion project. marks
h Calculate the present value of the aftertax operating cash flows. marks
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FINAB Summer II
Instructor: Rahman Khokhar
i Calculate the present value of the tax shield for the project. Use CCA tax shield formula from Finance I course. marks
j Calculate the present value of the terminal cash flows. marks
k Using an NPV analysis, would this expansion create value for BOE Enterprises? marks
I. Is BOE Enterprises stock riskier than that of a market portfolio? Why or why not? marks
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