Major Expansion Of Product Line And Cash Flows
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Major Expansion Of Product Line And Cash Flows
1) (Expected rate of return and risk) Syntax, Inc. is considering an investment in one of two common stocks.
- Given the information in the table, what is the expected rate of return for stock B?
- What is the standard deviation of stock B?
- What is the expected rate of return for stock A?
- Based on the risk (as measured by the standard deviation) and return of each stock which investment is better? (Round to 2 decimal places)
2) (NPV, PI, and IRR calculations) Fijisawa, Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. The initial outlay would be $1,960,000, and the project would generate cash flows of $380,000 per year for six years. The appropriate discount rate is 4.0 percent.
Major Expansion Of Product Line And Cash Flows
- Calculate the net present value.
- Calculate the profitability index.
- Calculate the internal rate of return.
- Should this project be accepted? Why or why not?
- 3) (Cost of debt) Sincere Stationery Corporation needs to raise $531,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 10.1 percent with interest paid semiannually and a 15-year maturity. Investors require a rate of return of 8.7 percent.
- Compute the market value of the bonds.
- How many bonds will the firm have to issue to receive the needed funds?
- What is the firm’s after-tax cost of debt if the firm’s tax rate is 32 percent?
4)(Cost of debt) Sincere Stationery Corporation needs to raise $451,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 11.1 percent with interest paid semiannually and a 15-year maturity. Investors require a rate of return of 9.6 percent.
- Compute the market value of the bonds.
- How many bonds will the firm have to issue to receive the needed funds?
- What is the firm’s after-tax cost of debt if the firm’s tax rate is 34 percent?
5) (Weighted average cost of capital) As a consultant to GBH Skiwear, you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. You have determined the market value of the firm’s current capital structure (which the firm considers to be its target mix of financing sources) as follows:
To finance the purchase, GBH will sell 20-year bonds with a $1,000 par value paying 8.4 percent per year (paid semiannually) at the market price of $929. Preferred stock paying a $2.51 dividend can be sold for $34.03. Common stock for GBH is currently selling for $49.09 per share. The firm paid a $4.06 dividend last year and expects dividends to continue growing at a rate of 4.5 percent per year into the indefinite figure. The firm’s marginal tax rate is 32 percent
- Calculate component weights of capital:
- What is the weight of debt in the firm’s capital structure?
- What is the weight of preferred stock in the firm’s capital structure?
- What is the weight of common stock in the firm’s capital structure?
- Calculate component costs of capital:
- What is the after-tax cost of debt for the firm?
- What is the cost of preferred stock for the firm?
- What is the cost of common equity for the firm?
- Calculate the firm’s weighted average cost of capital.
- What is the discount rate you should use to evaluate the warehouse project? (Round to 3 decimal places.)
6 (Capital structure weights) In August of 2010 the capital structure of the Emerson Electric Corporation (EMIR) (measured in book and market values) appeared as follows:- What weights should Emerson use when computing the firm’s weighted average cost of capital?
- What is the appropriate weight of debt? (Round to 1 decimal place.)
Major Expansion Of Product Line And Cash Flows
- What is the appropriate weight of common equity? (Round to 1 decimal place.)
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