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Problem #7: (7 MARKS) Tom Hortons needs to purchase equipment for its 2,500 drive-throughs nationwide. The total cost of the equipment is $2.5 million. It
Problem #7: (7 MARKS) Tom Hortons needs to purchase equipment for its 2,500 drive-throughs nationwide. The total cost of the equipment is $2.5 million. It is estimated that the after-tax cash inflows from the project will be $252,000 annually in perpetuity. Tom Hortons has a market value debt-to-assets ratio of 30%. The firm's cost of equity is 12%, its pre-tax cost of debt is 7%, and the flotation costs of debt and equity are 3% and 7%, respectively. The tax rate is 35%. Assume the project is of similar risk to the firm's existing operations. a) What is the weighted average cost of capital for Tom Hortons? b) Ignoring flotation costs, what is the NPV of the proposed project? c) What is the weighted average flotation cost for Tom Hortons? d) What is the dollar flotation cost for the proposed financing? e) After considering flotation costs, what is the NPV of the proposed project
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