Corporate Finance: The Core, Student Value Edition Plus Mylab Finance With Pearson Etext -- Access Card Package (4th Edition)
4th Edition
ISBN: 9780134426785
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 12, Problem 27P
You would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of 9%. However, the new business will be 25% debt financed, and you anticipate its debt cost of capital will be 6%. If its corporate tax rate is 40%, what is your estimate of its WACC?
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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
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Question content area bottom
Part 1
a. What is the NPV of the new product line (including any tax shields from leverage)?
The NPV of the new product line is
million. (Round to two decimal places.)
Part 2
b. How much debt will…
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
$8
million. The product will generate free cash flow of
$0.70
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
10.8%,
a debt cost of capital of
6.38%,
and a tax rate of
25%.
Markum maintains a debt-equity ratio of
0.50.
a. What is the NPV of the new product line (including any tax shields from leverage)?
b. How much debt will Markum initially take on as a result of launching this product line?
c. How much of the product line's value is attributable to the present value of interest tax shields?
Question content area bottom
Part 1
a. What is the NPV of the new product line (including any tax shields from leverage)?
The NPV of the new product line is
$enter your response here
million. (Round to two decimal places.)
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.)
Chapter 12 Solutions
Corporate Finance: The Core, Student Value Edition Plus Mylab Finance With Pearson Etext -- Access Card Package (4th Edition)
Ch. 12.1 - According to the CAPM, we can determine the cost...Ch. 12.1 - What inputs do we need to estimate a firms equity...Ch. 12.2 - How do you determine the weight of a stock in the...Ch. 12.2 - Prob. 2CCCh. 12.2 - Prob. 3CCCh. 12.3 - How can you estimate a stocks beta from historical...Ch. 12.3 - How do we define a stocks alpha, and what is its...Ch. 12.4 - Why does the yield to maturity of a firms debt...Ch. 12.4 - Prob. 2CCCh. 12.5 - What data can we use to estimate the beta of a...
Ch. 12.5 - Prob. 2CCCh. 12.6 - Why might projects within the same firm have...Ch. 12.6 - Under what conditions can we evaluate a project...Ch. 12.7 - Prob. 1CCCh. 12.7 - Prob. 2CCCh. 12 - Prob. 1PCh. 12 - Suppose the market portfolio has an expected...Ch. 12 - Prob. 3PCh. 12 - Suppose all possible investment opportunities in...Ch. 12 - Using the data in Problem 4, suppose you are...Ch. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Suppose that in place of the SP 500, you wanted to...Ch. 12 - Prob. 9PCh. 12 - You need to estimate the equity cost or capital...Ch. 12 - In mid-2012, Ralston Purina had AA-rated, 10-year...Ch. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Your firm is planning to invest in an automated...Ch. 12 - Consider the setting of Problem 18. You decided to...Ch. 12 - Prob. 20PCh. 12 - In mid-2015, Cisco Systems had a market...Ch. 12 - Weston Enterprises is an all-equity firm with two...Ch. 12 - Prob. 24PCh. 12 - Your company operates a steel plant. On average,...Ch. 12 - Prob. 26PCh. 12 - You would like to estimate the weighted average...
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