be repaid in one balloon payment at the end of the third year. The bank will charge the firm $21‚000 in flotation fees‚ which will be amortized over the three-year life of the loan. If Gemini financed the project entirely with equity‚ the firm’s cost of capital would be 18%. The corporate tax rate is 30%. Using the Adjusted Present Value (APV) method‚ determine whether or not Gemini should undertake the project. 17.3 MVP‚ Inc.‚ has produced rodeo supplies for over 20 years. The company currently
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income‚ and pecking order and financial slack C. Taxes‚ financial slack and pecking order‚ and uncertainty of operating income D. Taxes‚ asset types‚ and uncertainty of operating income E. None of the above. 3. Using the CAPM to calculate the cost of capital for a risky project assumes that: A. using the firm ’s beta is the same measure of risk as the project. B. the firm is all-equity financed. C. the financial risk is equal to business risk. D. Both A and B. E. Both A and C.
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tasks for the student are to resolve the debate‚ estimate weighted average costs of capital (WACCs) for the two business segments‚ and respond to the raider. Suggestions for complementary cases: “Nike Inc.” (case 13) gives an introductory exercise in the estimation of the cost of capital. “Coke vs. Pepsi‚ 2001” (case 14) offers the estimation of WACCs for two competitors and opportunities to reflect upon how business risk drives cost of capital. “Phon-Tech Corp.” (UVA-F-1161) is a simplified
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1. Wtd Cost of Capital Global Technology’s capital structure is as follows: Debt 35% Preferred Stock 15 Common Equity 50 The aftertax cost of debt is 6.5%; the cost of preferred stock is 10%; and the cost of common equity (in the form of retained earnings) is 13.5. Calculate Global Technology’s weighted average cost of capital. | Prop | Cost | Weight | Composite | Debt | 35% | 6.50% | 0.35 | 2.275 | Preferred Stock | 15% | 10% | 0.15 | 1.5 | Common Equity |
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were based in 1975 data PROBLEM: Determination of a minimum acceptable rate of return on new capital investments in 1975. Should the company adopt a system of multiple cutoff rates? FRAMEWORK OF ANALYSIS: WACC Return on Assets Cost of Common stock equity ANALYSIS: The management of Enzone Company is in a debate of whether to use the constant minimum rate for evaluating operations and investments‚ 10% since 1966‚ or have multiple cutoff rates per division. They also believe
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Chapter 6: Discussion Question #4 (p. 223) 4. Why is it usually easier to forecast sales for seasoned firms in contrast with early-stage ventures? Typically‚ it is easier to forecast a seasoned firm’s sales to that of an early-stage venture because the seasoned firm will have an operational history. Basing current sales on historical data is easier to do than trying to estimate sales based on little to no historical data to benchmark from. If you are a start-up / early-stage venture and
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make the online trading platform faster and closer to 100% reliability. Lastly‚ he has proposed increasing Ameritrade’s advertising budget to a cumulative $155 million for 1998 and 1999 fiscal years. Issue The question presented is what weighted average cost of capital should be employed to value the planned investments and changes in the advertising budget. Comparable Firms In my view‚ the true competitors of Ameritrade are securities brokerage firms‚ not Internet firms‚ as Ameritrade derives
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Questions 1. If Symonds Electronics Inc. were to raise all of the required capital by issuing debt‚ what would the impact be on the firm’s shareholders? The impact on shareholders can be analyzed by calculating the EPS and ROE of the firm under the alternative scenarios as follows: All Debt With $5‚000‚000 Expansion Current Growth in Revenues Revenues EBIT Interest EBT EBT*(1-T) # of shares EPS Debt Equity Debt/Equity Ratio Return on Equity 15‚000‚000 2‚250‚000 0 2‚250‚000 1‚350‚000 1‚000‚000 1.35
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Answer the following questions: a. Does Pioneer estimate its overall corporate weighted-average cost of capital correctly? I think they´re WACC is correctly estimated. They use 50% debt and 50% equity‚ which I think is very risky. I would prefer to use a 40% debt and a 60% equity in that way the company would be less riskier. Although I’m not an expert in this type of companies. b. Should Pioneer us a single corporate cost of capital‚ or multiple divisional hurdle rates in evaluating projects and allocating
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Case note on Nike Cost of Capital Group 2 Members : Devendra Rane‚ Vivekkumar Nema‚ Chandrashekhar Joshi‚ G. Ajithkumar‚ Prakash Shetty Case Background: * NorthPoint Large Cap Fund weighing whether to buy Nike’s stock. * Nike has experienced sales growth decline‚ declines in profits and market share. * Nike has revealed that it would increase exposure in mid-price footwear and apparel lines. It also commits to cut down expenses. * Kimi Ford’s initial assessment at a discount rate
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