CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavored liquor (BF Liquors). Suppose the firm faces a tax rate of 25% and collects the following information. If it plans to finance 10% of the new liquor-focused division with debt and the rest with equity, what WACC should it use for its liquor division? Assume a cost of debt of 5.1%, a risk-free rate of 3.3%, and a market risk premium of 6.3%. % Equity % Debt 96% 4% CoffeeStop BF Liquors 90% 10% Note: Assume that the firm will always be able to utilize its full interest tax shield. Beta 0.62 0.25 The weighted average cost of capital is %. (Round to two decimal places.)
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- Sam Holdings is planning to open a new wholesaling operation. The target operating profit margin is 25%. The unit contribution margin will be 40% of sales. Average annual sales are forecast to be $4,250,000. The firm's total asset is $8,750,000 with debt-asset ratio of 40%. The firm pays 12% interest on the debt and has 100,000 common stocks. The firm is subjected to corporate tax rate of 28%. What is the breakeven point in dollars for the firm?Sam Holdings is planning to open a new wholesaling operation. The target operating profit margin is 25%. The unit contribution margin will be 40% of sales. Average annual sales are forecast to be $4,250,000. The firm's total asset is $8,750,000 with debt-asset ratio of 40%. The firm pays 12% interest on the debt and has 100,000 common stocks. The firm is subjected to corporate tax rate of 28%. What will be its earnings per share if average annual sales drop by 20%?Southern Timber Company expects to earn $10 million in EBIT in the coming year. After that, its EBIT is expected to grow by 4% per year in perpetuity. Southern Timber is currently an unlevered firm with a cost of capital of 6%. The corporate tax rate is 30%. A panel of professional financial experts indicates that the company can enjoy a tax shield benefit of $20 million in firm value if the company changes its capital structure by allowing a certain amount of debt. What would be the value of Southern Timber Company if it decides to undertake the capital structure suggested by these financial experts?
- Harrier Company, which is just being formed, needs $1 million of assets and it expects to have a basic earning power ratio of 20%. It will own no securities, so all of its income will be operating income. If it chooses to, Harrier Company can finance up to 50% of its assets with debt, which will have an 8% interest rate. Assuming a 40 percent income tax rate, what is the difference in ROE if it finances its assets with 50% debt and if it finances its assets with pure common stocks?Southern Timber Company expects to earn $10 million in EBIT in the coming year. After that,its EBIT is expected to grow by 4% per year in perpetuity. Southern Timber is currently anunlevered firm with a cost of capital of 6%. The corporate tax rate is 30%. A panel ofprofessional financial experts indicates that the company can enjoy a tax shield benefit of $20million in firm value if the company changes its capital structure by allowing a certain amountof debt. What would be the value of Southern Timber Company if it decides to undertake thecapital structure suggested by these financial experts? handwrite pleaseSouthern Timber Company expects to earn $10 million in EBIT in the coming year. After that,its EBIT is expected to grow by 4% per year in perpetuity. Southern Timber is currently anunlevered firm with a cost of capital of 6%. The corporate tax rate is 30%. A panel ofprofessional financial experts indicates that the company can enjoy a tax shield benefit of $20million in firm value if the company changes its capital structure by allowing a certain amountof debt. What would be the value of Southern Timber Company if it decides to undertake thecapital structure suggested by these financial experts?
- You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $7 million. The product will generate free cash flow of $0.76 million the first year, and this free cash flow is expected to grow at a rate of 6% per year. Markum has an equity cost of capital of 10.9%, a debt cost of capital of 5.35%, and a tax rate of 42%. Markum maintains a debt-equity ratio of 0.40. What is the NPV of the new product line (including any tax shields from leverage)? (Round to two decimalplaces.) How much debt will Markum initially take on as a result of launching this product line? (Round to two decimalplaces.) How much of the product line's value is attributable to the present value of interest tax shields? (Round to two decimalplaces.)Hebner Housing Corporation has forecast the following numbers for this upcoming year: Sales = $1,000,000. Cost of goods sold = 600,000. Interest expense = 100,000. Net income = 180,000.The company is in the 40 percent tax bracket. Its cost of goods sold always represents 60 percent of its sales. That is, if the company’s sales were to increase to $1.5 million, its cost of goods sold would increase to $900,000. The company’s CEO is unhappy with the forecast and wants the firm to achieve a net income equal to $240,000. In order to achieve this level of net income, what level of sales will the company have to achieve? Assume that Hebner’s interest expense remains constant.Happy Times, Incorporated, wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Party Supply. Happy Times currently has debt outstanding with a market value of $120 million and a YTM of 6.8 percent. The company’s market capitalization is $260 million and the required return on equity is 15 percent. Joe’s currently has debt outstanding with a market value of $25.5 million. The EBIT for Joe’s next year is projected to be $17 million. EBIT is expected to grow at 10 percent per year for the next five years before slowing to 3 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 9 percent, 15 percent, and 8 percent, respectively. Joe’s has 2.15 million shares outstanding and the tax rate for both companies is 25 percent. a.What is the maximum share price that Happy Times should be willing to pay for…
- Price Corporation is considering selling to a group of new customers and creating new annual sales of $240,000. 3% will be uncollectible. The collection cost on all accounts is 6% of new sales, the cost of producing and selling is 83% of sales, and the firm is in the 22% tax bracket. What is the profit on new sales?Sam Holdings is planning to open a new wholesaling operation. The target operating profit margin is 25%. The unit contribution margin will be 40% of sales. Average annual sales are forecast to be $4,250,000. The firm's total asset is $8,750,000 with debt-asset ratio of 40%. The firm pays 12% interest on the debt and has 100,000 common stocks. The firm is subjected to corporate tax rate of 28%. What is the degree of combined/total leverage (DCL/DTL)?Seattle Health Plans currently uses zero-debt financing. Its operating profit is $1 million, and it pays taxes at a 40 percent rate. It has $5 million in assets and, because it is all-equity financed, $5 million in equity. Suppose the firm is considering replacing half of its equity financing with debt financing that bears an interest rate of 8 percent. What impact would the new capital structure have on the firm’s profit, total dollar return to investors, and return on equity? Redo the analysis, but now assume that the debt financing would cost 15 percent. Repeat the analysis required for part a, but now assume that Seattle Health Plans is a not-for-profit corporation and hence pays no taxes. Compare the results with those obtained in part a