Other relevant information about the company follows: The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent. Required: Answer the following questions given the information above Calculate to the following for Pharmos considering its tax rate of 25%: i. Total Market Value for the Firm ii. After-tax cost of Loan NO EXCEL SPREADSHEETS SHOW FULL WORKINGS WITHOUT EXCEL
Other relevant information about the company follows: The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent. Required: Answer the following questions given the information above Calculate to the following for Pharmos considering its tax rate of 25%: i. Total Market Value for the Firm ii. After-tax cost of Loan NO EXCEL SPREADSHEETS SHOW FULL WORKINGS WITHOUT EXCEL
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk
Section: Chapter Questions
Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...
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Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.
Required: Answer the following questions given the information above
Calculate to the following for Pharmos considering its tax rate of 25%:
i. Total Market Value for the Firm
ii. After-tax cost of Loan
NO EXCEL SPREADSHEETS
SHOW FULL WORKINGS WITHOUT EXCEL
Transcribed Image Text:Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new
production line of portable electrocardiogram (ECG) machines for its clients who suffer from
cardiovascular diseases. The company must invest in equipment which cost $2,500,000 and falls
within a MARCS depreciation of 5-years and is expected to have a scrape value of $200,000 at|
the end of the project. Other than the equipment, the company needs to increase its cash and
cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts
receivable by $250,000 and increase account payable by $50,000 at the beginning of the
project. Pharmos Incorporated expect the project to have a life of five years. The company
would have to pay for transportation and installation of the equipment which has an invoice
price of $450,000o.
The company has already invested $75,000 in Research and Development and therefore
expects a positive impact on the demand for the new product line. Expected annual sales for
the ECG machines in the first three years are $1,200,000 and $850,000 in the following two
years. The variable costs of production are projected to be $267,000 per year in years one to
three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of
the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000
in profit, EACH YEAR in contribution after taxes, due to a decrease in sales of the other lines of
tester machines produced by the company. By investing in the new product line Pharmos
Incorporated would have to use a packaging machine which the company already has and will
be sold at the end of the project for $350,000 after-tax in the equipment market.
Transcribed Image Text:The company will contract a new loan in the sum of $2,000,000 that is secured by
machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also
issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually, and
matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2
percent per issue.
The company's preferred stock pays an annual dividend of 4.5 percent and is currently
selling for $60, and there are 100,000 shares outstanding.
• There are 300,000 shares of common stock outstanding, and they are currently selling
for $21 each. The beta on these shares is 0.95.
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