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Mini Inc. is considering a new project. The equipment costs $42M, will be depreciated on a straight-line basis over 3 years to a zero-book value
Mini Inc. is considering a new project. The equipment costs $42M, will be depreciated on a straight-line basis over 3 years to a zero-book value and can be sold for 5M at the end of 3 years. It will generate net operating profit after taxes (NOPAT) of 4.5M per year for 3 years. There is no net working capital expenditure. The tax rate is 25%. The target debt ratio (D/V) is 30% debt and the rest from retained earnings. • They currently have 3-year debt that trades at a price of $970 per bond. The coupon rate is 5.95%, and coupons are annual. The face value is $1000. The before-tax cost on any new bonds will be the same as the yield to maturity on the current bonds. Any issue costs are negligible. • Analysts forecast a dividend of $4.75 for next year and the current price is $38 per share. The growth rate is 3%. Issue costs for common stock are 5%.
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Step: 1
Part a Calculating NPV 1 Calculate the aftertax cash flows NOPAT 45M Tax rate 25 Aftertax profit NOPAT 1 Tax rate 45M 1 025 3375M 2 Calculate the depreciation expense Equipment cost 42M Depreciation p...Get Instant Access to Expert-Tailored Solutions
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Step: 3
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