Alpha Industries is considering a project with an initial cost of $7.5 million. The project will produce cash inflows of $1.55 million per year for 7 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.46 percent and a cost of equity of 11.17 percent. The debt-equity ratio is .55 and the tax rate is 21 percent. What is the net present value of the project?
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- You have been asked by the chief financial officer of your company to estimate what thecompany’s share price will be at the end of four years from today. Your company has recentlypaid a dividend of $1.00 which is expected to grow at 5% p.a. over the foreseeable future. Ifthe company’s required rate of return on equity is 10% your price estimate at the end of year 4will be closest to: A. $20.00.B. $21.00.C. $24.30.D. $25.50.Horizon value question A project involved initial construction costs of $1.75 million. After 15 years, the useful life of that construction will be over and the facility will be demolished, involving sensitive environmental protections and cleanup. You estimate that 25% of the cost of the facility represents items that could be sold for scrap at 30% of their initial construction cost. You estimate the proper demolition cost of such a facility to be $0.9M. a. What is the NPV of the horizon value if the real discount rate is 0.035? b. If the expected annual rate of inflation is 0.02, what is the nominal horizon value in 15 years?Assuming monetary benefits of an information system at $85,000 per year, one-time costs of $75,000, recurring costs of $35,000 per year, a discount rate of 12 percent, and a 5-year time horizon, calculate the net present value (NPV) of the system’s costs and benefits. Also calculate the overall return on investment (ROI) of the project and then present a break-even analysis (BEA). At what point does break-even occur?
- 13.3 Ganado’s Cost of Capital. Maria Gonzalez now estimates Ganado’s risk-free rate to be 3.60%, the company’s credit risk premium is 4.40%, the domestic beta is estimated at 1.05, the international beta is estimated at 0.85, and the company’s capital structure is now 30% debt. All other values remain the same as those presented in this chapter in the section “Sample Calculation: Ganado’s Cost of Capital.” For both the domestic CAPM and ICAPM, calculate the following: Sample Calculation: Ganado’s Cost of Capital Maria Gonzalez, Ganado’s chief financial officer, wants to calculate the company’s weighted average cost of capital in both forms, the traditional CAPM and also ICAPM. Maria assumes the risk-free rate of interest as 4%, using the U.S. government 10-year Treasury bond rate. The expected rate of return of the market portfolio is assumed to be 9%, the expected rate of return on the market portfolio held by a well-diversified domestic investor. Ganado’s estimate of…Debbie's Cookies has a return on assets of 8.1 percent and a cost of equity of 12.5 percent. What is the pretax cost of debt if the debt–equity ratio is .87? Ignore taxes.A share of stock of A-Star Inc. is now selling for $23.50. A financial analyst summarizes the uncertainty about the rate of return on the stock by specifying three possible scenarios: Business Condition Scenario, s Probability, p(s) End of Year Price Annual Dividend High growth 1 0.35 $35 $ 4.40 Normal growth 2 0.30 27 4.00 No growth 3 0.35 15 4.00 What are the holding-period returns for a one-year investment in the stock of A-Star Inc. for each of the three scenarios? Calculate the expected HPR and standard deviation of the HPR.
- 6 The economic analysis of a project foresees annual investments equal to R$300,000,000.00, over three years of construction, followed by a very long period, which can be considered infinite, with an annual revenue of R$300,000,000.00 and annual operating costs (including taxes) of BRL 120,000,000.00. Obtain the net present value (NPV) of this project, in the year of the first investment, considering the minimum rate of attractiveness equal to 12% per year.A stock now trades for 11 TL per share and distributes 0.16 TL in dividends annually. What is the stock worth to an investor if she anticipates selling it for 14 TL in a year and demands a 10% return on equity investments? a. 12,89%b. 12,73%c. 12,87%d. 10%The most recent annual dividend of XYZ Ltd. was $1.80 per share and the required return is 11%. The management estimated that the dividends were expected to grow at a rate of 8% annually for three years, followed by a 5% constant annual growth rate in years 4 through infinity. The price of XYZ's stock should be about: a. $29 b. $43 c. $34 d. $5
- Calculation question: Suppose the following data accurately estimates the costs and benefits you outlined in #1. Calculate NPV assuming a discount rate of 4%. Should ISU invest in this project? Year Costs Benefits 0 1000 400 1 200 500 2 200 500 3 200 500A share of stock in Enbridge Inc. pays an annual dividend of $3.34, and the dividend is expected to grow at 2%, on average, in the foreseeable future. The current market price is $44.58/share. Below are the three individuals based on risk perception by each individual (from low to high). Identify who will likely be a buyer or a seller of this stock. (Each individual currently owns 100 shares.) Individual X has a discount rate of 5% Individual Y has a discount rate of 8% Individual Z has a discount rate of 11%A stock currently sells for 11 TL per share and pays 0.16 TL per year in dividends. What is an investor's valuation of this stock if she expects it to be selling for 14 TL in one year and requires a 10 % return on equity investments? a. 12,89% b. 12,73% c. 12,87% d. 10%