QUESTION The Byer Corporation, which has a 16 percent after-tax cost of capital, is considering the acquisition of the Cellar Company, which has about the same degree of systematic risk. If the merger were effected, the incremental cash flows would be as follows:AVERAGE FOR YEARS (in millions)1561011151620Annual cash income attributable to Cellar$10$15$20$15Required new investment251010Net after-tax […]
QUESTION Gillis Manufacturing Company has in its capital structure $20 million of 13.5 percent sinking-fund debentures. The sinking-fund call price is $1,000 per bond, and sinking-fund payments of $1 million in face amount of bonds are required annually. At present, the yield to maturity on the debentures in the market is 12.21 percent. To satisfy […]
QUESTION NPV and IRR Benson Designs has prepared the following estimates for a long term project it is considering. The initial investment is $18,250, and the project is expected to yield after-tax cash inflows of $4,000 per year for 7 years. The firm hasa 10% cost of capital.a. Determine the net present value (NPV) for […]
QUESTION Rebecca Isbell Optical Corporation is trying to determine an appropriate capital structure. It knows that, as its financial leverage increases, its cost of borrowing will eventually increase as will the required rate of return on its common stock. The company has made the following estimates for various financial leverage ratios.REQUIRED RATE OF RETURN ON […]
QUESTION Herky Foods is considering acquisition of a new wrapping machine. The initial investment is estimated at $1.25 million, and the machine will have a 5-year life with no salvage value. Using a 6% discount rate, determine the net present value (NPV) of the machine given its expected operating cash inflows shown in the following […]
QUESTION The Totally Tubular Tube Company wishes to evaluate three new investment proposals. The firm is concerned with the impact of the proposals on its total risk. Consequently, it has determined expected values and standard deviations of the probability distributions of possible net present values for the possible combinations of existing projects, E, and investment […]
QUESTION The cost of debt Gronseth Drywall Systems, Inc., is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different maturities will carry different coupon rates and sell at different prices. The firm must choose among several alternatives. In each case, the bonds will […]
QUESTION Assume that B (in Problem ) is $3 million and S is $7 million. The bonds have a 14 percent yield to maturity, and the stock is expected to pay $500,000 in dividends this year. The growth rate of dividends has been 11 percent and is expected to continue at the same rate. Find […]
QUESTION Coefficient of variation Metal Manufacturing has isolated four alternatives for meeting its need for increased production capacity. The following table summarizes data gathered relative to each of these alternatives.ExpectedStandard deviationAlternativereturnof returnA20%7.0%B229.5C196.0D165.5a. Calculate the coefficient of variation for each alternative.b. If the firm wishes to minimize risk, which alternative do you recommend? Why? Concept: Coefficient […]
QUESTION Zydeco Enterprises is considering undertaking a special project requiring an initial outlay of $90,000. The project would have a two-year life, after which there will be no expected salvage or terminal value. The possible incremental after-tax cash flows and associated probabilities of occurrence are as follows: Net Cash flows for 1st year= $60,000*0.3= $18,000 […]
