Question
I Wish to see step by step answers by plugging in the numbers into formula BMM Co.shares have a required rate of return of 12%,
I Wish to see step by step answers by plugging in the numbers into formula
BMM Co.shares have a required rate of return of 12%, BMM bonds carry an 8.00% coupon rate and a yield-to-maturity of 7.00%. The market value of the bonds is $400 million. BMM stock, of which 40 million shares are outstanding, sells for $ 15 per share. The corporate tax rate is very favourable at a low rate of 20%. No preferred shares are outstanding.
BMM must decide whether or not to purchase additional capital equipment. The cost of the requirement is $20 million. The expected after-tax net cash flows from the new equipment are $3 million a year for the first 5 years and $2.5 million a year for another five more years. This salvage value is zero. Should BMM purchase the equipment?(note: the depreciation tax savings are ready included in the calculation of after-tax next cash flows)
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