Berkshire Hathaway Inc. is considering a business expansion to the gambling industry by acqui year indefinitely. The risk-free rate of return is 5% and the market risk premium, over and above the risk-free rat Berkshire estimates that the beta of the casino is 1.2 and plans to maintain the debt-equity rati which pay an annual coupon of 4% and have a yield to maturity of 5%. Berkshire faces a 40% ta What is the maximum price Berkshire would pay for the casino in order for the acquisition to b a. $150.0 million

Berkshire Hathaway Inc. is considering a business expansion to the gambling industry by acqui year indefinitely. The risk-free rate of return is 5% and the market risk premium, over and above the risk-free rat Berkshire estimates that the beta of the casino is 1.2 and plans to maintain the debt-equity rati which pay an annual coupon of 4% and have a yield to maturity of 5%. Berkshire faces a 40% ta What is the maximum price Berkshire would pay for the casino in order for the acquisition to b a. $150.0 million

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question 6 "Axon Industries needs to raise $250,000 USDs for a new investment project. If the firm issues 1-year debt, it may have to pay an interest rate of 15%, although Axon's managers believe that 8.5% would be a fair rate given the level of risk. If the firm issues equity, they believe the equity may be underpriced by 11%.What is the cost (in USDs) to current shareholders of financing the project out of equity? Note: Express your answers in strictly numerical terms. For example, if the answer is $500
Hw.16. Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt–equity ratio of .45, but the industry target debt–equity ratio is .40. The industry average beta is 1.30. The market risk premium is 8 percent, and the risk-free rate is 6 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 35 percent. The project requires an initial outlay of $676,000 and is expected to result in a $96,000 cash inflow at the end of the first year. The project will be financed at the company’s target debt–equity ratio. Annual cash flows from the project will grow at a constant rate of 6 percent until the end of the fifth year and remain constant forever thereafter. Calculate the NPV of the project.
Question 3Firm A plans to acquire Firm B. The acquisition would result in incremental cash flowsfor Firm A of £10 million in each of the first five years. Firm A expects to divest Firm Bat the end of the fifth year for £100 million. The β for Firm A is 1.1, which is expectedto remain unchanged after the acquisition. The risk-free rate, Rf, is 7 per cent, andthe expected market rate of return, Rm, is 15 per cent. Firm A is financed by 80 percent equity and 20 per cent debt, and this leverage will also remain unchanged afterthe acquisition. Firm A pays interest of 10 per cent on its debt, which will alsoremain unchanged after the acquisition.Required:a) Disregarding taxes, what is the maximum price that Firm A should pay for Firm B?b) Firm A has a share price of £30 per share and 10 million shares outstanding. IfFirm B’s shareholders are to be paid the maximum price determined in part (a) viaa new share issue:i. how many new shares will be issued ii. what will be the post-merger share…
13.15 Calculating Flotation Costs Southern Alliance Company needs to raise $75 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Flotation costs for issuing new common stock are 7 percent; for new preferred stock, 4 percent; and for new debt, 3 percent. What is the true initial cost figure the company should use when evaluating its project?
Problem 12-21 WACC and NPV [LO 4] Ariana, Incorporated, is considering a project that will result in initial aftertax cash savings of $5.4 million at the end of the first year, and these savings will grow at a rate of 3 percent per year, indefinitely. The firm has a target debt-equity ratio of .53, a cost of equity of 13.3 percent, and an aftertax cost of debt of 6.7 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. Calculate the required return for the project. Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. What is the maximum cost the company would be willing to pay for this project? Note: Do not round
Q 20. Super Startup Corp. (SSC) currently has a rate of return on capital (ROC) of 8% and is expected to be able to maintain that in perpetuity. SSC is expected to reinvest 75% of its free cash flow to the firm. The company is expected to have a free cash flow to the firm of $1 million next year and will have a weighted-average cost of capital of 10% in perpetuity. The intrinsic value of the firm today must be equal to: Options - $100.00 million $50.00 million $25.00 million $12.50 million
11. Stock Valuation. Sarro Shipping, Inc., expects to earn $1.3 million per year in perpetuity if it undertakes no new investment opportunities. There are 100,000 shares of stock outstanding, so earnings per share equal $13($1,300,000/100,000). The firm will have an opportunity at date 1 to spend $1,300,000 on a new marketing campaign. The new campaign will increase earnings in every subsequent period by $260,000 (or $ 2.6 per share). The firm’s discount rate is 10 percent. What is the value per share before and after deciding to accept the marketing campaign?
ASAP!! IN 20 minns Karachi Electric Supply Company (KESC) uses only debt and equity. It can borrow unlimited amounts at an interest rate of 11 percent as long as it finances at its target capital structure, which calls for 45 percent debt and 55 percent common equity. Its last dividend was Rs 12, its expected constant growth rate is 4 percent, and its stock sells at a price of Rs. 50. KESC’s tax rate is 40 percent. Two projects are available: Project A has a rate of return of 13 percent, while Project B has a rate of return of 10 percent. All of the company’s potential projects are equally risky and as risky as the firm’s other assets. What is KESC’s cost of common equity? What is KESC’s WACC? c. Which projects should KESC’s select? and why?
17.1. Firm Value Morrow Corp. has EBIT of $775,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 12 percent and the corporate tax rate is 24 percent. The company also has a perpetual bond issue outstanding with a market value of $1.8 million. What is the value of the company? The CFO of the company informs the company president that the value of the company is $4.6 million. Is the CFO correct?
J 7 Qualtronics, Inc is raising capital for a new silicon chip manufacturing facility. They've raised $20 million from issuing bonds with a coupon rate of 8.2% per year, $30 million from a corporate loan with an interest rate of 9.6% per year, and $50 million from using retained earnings with a opportunity cost of 12% per year. If their effective tax rate is 26%, what is their after-tax WACC?
Question 41 A firm’s expected free cash flow in 2013 (FCF1) was $180 million, and expect its free cash flow has a constant growth rate at 5%. If the weight average cost of capital (WACC) for the firm is 10%, what’s the estimated value for the firm’s operating assets? $1,800 millions $3,600 millions $3,780 millions $3,980 millions
MCQ'S: 6) Alpha Products maintains a capital structure of 40% debt and 60% common equity. To finance its capital budget for next year, the firm will sell $50 million of 11% debentures at par and finance the balance of its $125 million capital budget with retained earnings. Next year Alpha expects net income to grow 7% to $140 million, and dividends also are expected to increase 7% to $1.40 per share and to continue growing at that rate for the foreseeable future. The current market value of Alpha's stock is $30. If the firm has a marginal tax rate of 40%, what is its weighted cost of capital for the coming year? a.11.67% b.9.84% c.9.64% d.8.63% 7) If a firm sells assets, generating cash flows, the cost of these funds is __. a.the firm's cost of equity b.zero c.the firm's cost of cash flows d.the firm's weighted cost of capital 8) Calculate the weighted average…

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