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Question 1 Consider the following firm with a c...




Question 1 Consider the following firm with a capital structure of 15% debt, 80% equity, and 5% preferred stock (all based on market values). The outstanding debt has a yield-to-maturity of 9%, whereas both regular equity and preferred equity are currently priced at $100. The regular annual dividends are expected to be $5 next time growing at 2% annually. Preferred dividends are $1 (non-growing) per year. The firm pays 20% in taxes. Based on this information, what is the overall firm beta of this firm, given a risk free rate of return of 2% and an expected return on the market portfolio equal to 8%? Question 2 Suppose your company is currently using 30% debt in its capital structure. The target level of debt is 50%, and the YTM on debt is currently 9%, but is expected to increase to 9.5% because bankruptcy risk and agency costs. The corporate tax rate is 35% and the return on equity is currently 15%. What is the Rwacc under the new capital structure? Question 3 Consider the following project. Replacement of old equipment for newer and more efficient equipment is expected to yield annual total after-tax cost savings (including any tax shields from depreciation) resulting in operational cash flows of $14 million for 12 years, starting t=1. The new equipment has a cost of $80 million and is depreciated over 10 year according to straight-line methodology. The salvage value at t=12 is $15 million. The corporate tax rate is 30% and the firm has a target debt-to-equity ratio of 0.5. Creditors require 12% return on their debt and the equity beta of the firm is 1.8. The expected return on the S&P 500 index is 12% and on a t-bill is 4%. a) What are the relevant cash flows during each year (t=0,12)? b) What is the firm?s target debt-to-value (leverage) ratio? c) What is the firm?s cost of equity? d) What is the firm?s cost of debt? e) What is the weighted average cost of capital (Rwacc)? f) What is the beta for the entire firm?not just its equity? g) What is the NPV of this project and should they accept it? Question 4 Consider the following project for your firm. An initial investment of $1 million will generate expected unlevered pre-tax cash flows (UCF) of $300,000 per year in perpetuity. The firm will finance this project maintaining its capital structure with equal amounts of debt and equity. Three of your firm?s closest competitors have unlevered betas of respectively 1.2, 1.3, and 1.4. These firms are approximately equal in size. The risk free rate is currently 5%, while the expected return on the S&P 500 index is 14%. The corporate tax rate is 34%. The firm can borrow risk free. a) What is the average unlevered equity beta in the industry? b) What is the levered beta for the project? c) What is Re? d) What is Rwacc? e) What is the NPV of this project using Rwacc? f) How much will they borrow? g) What is the annual interest payment? h) What is the initial equity stake? i) Use the Flow-to-Equity approach to value this project.,Hello, Will my questions be approved?,May I have a response?


Paper#4248 | Written in 18-Jul-2015

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