Question 11

NPV of Loans: Kendrick Enterprises is evaluating see 10-year, 8 percent loan with gross proceeds of $5.85 million. The interest payments on the loan will be made annually. Flotation costs are estimated to be 2.5 percent of gross proceeds and will be amortized using a straight-line schedule over the 10-year life of the loan. The company has a tax rate of 40 percent, and the loan will not increase the risk of financial distress for the company.

Calculate the net present value of the loan including flotation costs.

Group of answer choices

1. $1,149,131
2. $1,109,877
3. None of these values are correct.
4. $1,224,724

Question 12

Valuation: National Electric Company is considering a $45 million project in its power systems division. Tom Edison, the current chief financial officer, has evaluated the project and determined that the projects unlevered cash flows will be $3.1 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: issuing 10-year bonds or issuing common stock. NEC's pre-tax cost of debt is 6.9 percent, and its cost of equity is 10.8 percent. The company's target debt-to-value ratio is 80 percent. The project is the same risk as NECs existing businesses, and it will support the same amount of debt. NEC is in the 34% tax bracket. Should NEC invest in the project?

Group of answer choices

1. No; the NPV is negative, so NEC should not invest in the project.
2. None of these answers are correct.
3. Yes; the NPV is positive, so NEC should invest in the project.
4. Whether NEC should invest or not invest depends upon how they choose to finance the project.

Question 13

APV: SunRa, Inc. has produced solar panels for over 20 years. The company currently has a debt-equity ratio of 50 percent and is in the 40 percent tax bracket. The required return on the firm's levered equity is 16 percent. SunRa is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows:

year:	0	1	2	3
Cash Flow:	-$18,000,000	5,700,000	9,500,000	8,800,000

The company has arranged a $9.3 million debt issue to partially finance the expansion. Under the loan, the company would pay interest of 9 percent at the end of each year on the outstanding balance at the beginning of the year. The company would also make year-end principal payments of $3,100,000 per year, completely retiring the issue by the end of the third year. If as an analyst Tom are asked to use the adjusted present value method to value this project, what is the cost of equity he should use to value project cash flows?

Group of answer choices

1. 18.1 percent
2. None of these values are correct.
3. 16.0 percent
4. 14.4 percent

Question 14

APV: SunRa, Inc. has produced solar panels for over 20 years. The company currently has a debt-equity ratio of 50 percent and is in the 40 percent tax bracket. The required return on the firm's levered equity is 16 percent. SunRa is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows:

year:	0	1	2	3
Cash Flow:	-$18,000,000	5,700,000	9,500,000	8,800,000

The company has arranged a $9.3 million debt issue to partially finance the expansion. Under the loan, the company would pay interest of 9 percent at the end of each year on the outstanding balance at the beginning of the year. The company would also make year-end principal payments of $3,100,000 per year, completely retiring the issue by the end of the third year. Assuming the firm's unlevered cost of equity is expected to be 17 percent over the life of the project, what is the NPV of the project if using all-equity financing?

Group of answer choices

1. -$693,866
2. $3,746,223
3. $124,087
4. None of these values are correct.

Question 15

APV: SunRa, Inc. has produced solar panels for over 20 years. The company currently has a debt-equity ratio of 50 percent and is in the 40 percent tax bracket. The required return on the firm's levered equity is 16 percent. SunRa is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows:

year:	0	1	2	3
Cash Flow:	-$18,000,000	5,700,000	9,500,000	8,800,000

The company has arranged a $9.3 million debt issue to partially finance the expansion. Under the loan, the company would pay interest of 9 percent at the end of each year on the outstanding balance at the beginning of the year. The company would also make year-end principal payments of $3,100,000 per year, completely retiring the issue by the end of the third year. What is the net present value of the financial arrangement that SunRa plans to use for this expansion?

Group of answer choices

1. $9,300,000
2. $502,200
3. None of these values are correct.
4. $5,580,000

Question 16

APV: SunRa, Inc. has produced solar panels for over 20 years. The company currently has a debt-equity ratio of 50 percent and is in the 40 percent tax bracket. The required return on the firm's levered equity is 16 percent. SunRa is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows:

year:	0	1	2	3
Cash Flow:	-$18,000,000	5,700,000	9,500,000	8,800,000

The company has arranged a $9.3 million debt issue to partially finance the expansion. Under the loan, the company would pay interest of 9 percent at the end of each year on the outstanding balance at the beginning of the year. The company would also make year-end principal payments of $3,100,000 per year, completely retiring the issue by the end of the third year. Suppose the net present value of project is break even when cash flows are evaluated at the unlevered cost of equity capital; and suppose the net present value of the financing side effects are $1 million. What is the project adjusted present value?

Group of answer choices

1. Less than $1 million
2. None of these values are correct.
3. $1 million
4. More than $1 million.

QUESTION 17- Equipment Purchase Valuation:

Mighty Wind, Inc. is considering a scale-expanding investment of $42 million. The investment is expected to generate an EBITDA of $13.63 million per year for five years. The investment would be depreciated straight-line over that same time period. The company tax rate is 35 percent.

The company has bonds outstanding with the total market value of $55 million and a yield to maturity of 6.5 percent. The company also has 4.5 million shares of common stock outstanding, which are selling at a share price of $25. The companys CEO considers the firms current debt equity ratio optimal.

Easy-Breeze, LLC is a publicly traded all-equity competitor with a of .7892. The expected market risk premium is 7.5 percent. Treasury bills are currently priced at 3.4 percent.

• use the weighted average cost of capital approach to determine Mighty Wind should make the investment.
• suppose the company decides to fund this investment entirely with debt. Determine the appropriate cost of capital; explain.