ESSEN OF CORP FINC (LOOSE) >C<
9th Edition
ISBN: 9781260725131
Author: Ross
Publisher: MCG CUSTOM
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Chapter 12, Problem 2CC
Cost of Capital for Layton Motors
You have recently been hired by Layton Motors, Inc. (LMI), in its relatively new treasury management department. LMI was founded eight years ago by Rachel Layton. Rachel found a method to manufacture a cheaper battery that will hold a larger charge, giving a car powered by the battery a range of 700 miles before requiring a recharge. The cars manufactured by LMI are midsized and carry a price that allows the company to compete with other mainstream auto manufacturers. The company is privately owned by Rachel and her family, and it had sales of $197 million last year.
LMI primarily sells to customers who buy the cars online, although it does have a limited number of company-owned dealerships. The customer selects any customization and makes a deposit of 20 percent of the purchase price. After the order is taken, the car is made to order, typically within 45 days. LMI’s growth to date has come from its profits. When the company had sufficient capital, it would expand production. Relatively little formal analysis has been used in its capital budgeting process. Rachel has just read about capital budgeting techniques and has come to you for help. For starters, the company has never attempted to determine its cost of capital, and Rachel would like you to perform the analysis. Because the company is privately owned, it is difficult to determine the
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2. To estimate the cost of equity for TSLA, go to finance.yahoo.com and enter the ticker symbol TSLA. Follow the links to answer the following questions: What is the most recent stock price listed for TSLA? What is the market value of equity, or market capitalization? How many shares of stock does TSLA have outstanding? What is the most recent annual dividend? Can you use the
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eEgg is considering the purchase of a new distributed network computer system to help handle Its warehouse Inventories. The system
costs $55,000 to purchase and install and $32,000 to operate each year. The system is estimated to be useful for 4 years.
Management expects the new system to reduce the cost of managing Inventories by $60,000 per year. The firm's cost of capital
(discount rate) is 10%.
Required:
1. What is the net present value (NPV) of the proposed Investment under each of the following Independent situations? (Use the
appropriate present value factors from Appendix C, TABLE 1 and Appendix C. TABLE 2.)
1a. The firm is not yet profitable and therefore pays no income taxes.
1b. The firm is in the 22% Income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules
do not apply.
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four-year life, the DDB…
You were hired as the CFO of a new company that was founded by three professors at your university. The company plans to manufacture and sell a new product, a cell phone that can be worn like a wrist watch. The issue now is how to finance the company, with equity only or with a mix of debt and equity. The price per phone will be $250.00 regardless of how the firm is financed. The expected fixed and variable operating costs, along with other data, are shown below. How much higher or lower will the firm's expected ROE be if it uses 60% debt rather than only equity, i.e., what is ROEL - ROEU?
0% Debt, U
60% Debt, L
Expected unit sales (Q)
33,500
33,500
Price per phone (P)
$250.00
$250.00
Fixed costs (F)
$1,000,000
$1,000,000
Variable cost/unit (V)
$200.00
$200.00
Required investment
$2,500,000
$2,500,000
% Debt
0.00%
60.00%
Debt, $
$0
??
Equity, $
$2,500,000
??
Interest rate
NA
10.00%
Tax rate
25.00%
25.00%
Group of answer choices…
Nirvana Chip Designs has finished designing its next generation of chips, the XJ5000 series and is getting ready to start production. As the analyst on the project, you are required to prepare pro forma free cash flows. Which of the following are relevant to your analysis?
Design cost for the chips
Potential lost sales of the XJ4000 chips
Proportional cost of the corporate jet lease
Start-up investment in raw materials
Upgrades to the chip fabrication facility required if the chip is produced
Market research done to guide the development of the new chip
Market value of land and buildings where new chip will be produced
Design cost for the chips. (Select the best choice below.)
A.
This is relevant because it is an investment in working capital.
B.
This is relevant as it represents cannibalization of existing sales.
C.
This is irrelevant because it is a sunk cost.
D.
This is irrelevant as it represents existing overhead.
b. Potential lost sales…
Chapter 12 Solutions
ESSEN OF CORP FINC (LOOSE) >C<
Ch. 12.1 - What is the primary determinant of the cost of...Ch. 12.1 - What is the relationship between the required...Ch. 12.2 - Prob. 12.2ACQCh. 12.2 - Prob. 12.2BCQCh. 12.3 - Prob. 12.3ACQCh. 12.3 - Prob. 12.3BCQCh. 12.3 - Prob. 12.3CCQCh. 12.4 - Prob. 12.4ACQCh. 12.4 - Why do we multiply the cost of debt by (1 TC)...Ch. 12.4 - Under what conditions is it correct to use the...
Ch. 12.5 - Prob. 12.5ACQCh. 12.5 - Prob. 12.5BCQCh. 12.6 - Prob. 12.6ACQCh. 12.6 - Prob. 12.6BCQCh. 12 - Section 12.1What are the components used to...Ch. 12 - Prob. 12.2CCh. 12 - Prob. 12.3CCh. 12 - Prob. 12.4CCh. 12 - Section 12.5True or False: Projects should always...Ch. 12 - WACC. On the most basic level, if a firms WACC is...Ch. 12 - Prob. 2CTCRCh. 12 - Project Risk. If you can borrow all the money you...Ch. 12 - LO4 12.4WACC and Taxes. Why do we use an aftertax...Ch. 12 - DGM Cost of Equity Estimation. What are the...Ch. 12 - Prob. 6CTCRCh. 12 - Prob. 7CTCRCh. 12 - Prob. 8CTCRCh. 12 - Prob. 9CTCRCh. 12 - Prob. 10CTCRCh. 12 - Prob. 1QPCh. 12 - Calculating Cost of Equity. Halestorm Corporations...Ch. 12 - Calculating Cost of Equity. Stock in CDB...Ch. 12 - Estimating the DCF Growth Rate. Suppose Hornsby...Ch. 12 - Prob. 5QPCh. 12 - LO2 6Calculating Cost of Debt. ICU Window, Inc.,...Ch. 12 - LO2 7Calculating Cost of Debt. Jimmys Cricket Farm...Ch. 12 - Calculating Cost of Debt. For the firm in Problem...Ch. 12 - Calculating WACC. Bargeron Corporation has a...Ch. 12 - Prob. 10QPCh. 12 - Prob. 11QPCh. 12 - Book Value versus Market Value. Bonaime, Inc., has...Ch. 12 - Calculating the WACC. In Problem 12, suppose the...Ch. 12 - WACC. Clifford, Inc., has a target debtequity...Ch. 12 - Prob. 15QPCh. 12 - Finding the WACC. Hankins Corporation has 5.4...Ch. 12 - SML and WACC. An all-equity firm is considering...Ch. 12 - Calculating the WACC. You are given the following...Ch. 12 - Calculating Capital Structure Weights. Liu...Ch. 12 - Calculating the WACC. Gnomes R Us is considering a...Ch. 12 - Prob. 21QPCh. 12 - Calculating the Cost of Debt. Ying Import has...Ch. 12 - Prob. 23QPCh. 12 - Adjusted Cash Flow from Assets. Ward Corp. is...Ch. 12 - Adjusted Cash Flow from Assets. In the previous...Ch. 12 - Prob. 26QPCh. 12 - WACC and NPV. Photochronograph Corporation (PC)...Ch. 12 - Project Evaluation. This is a comprehensive...Ch. 12 - Prob. 1CCCh. 12 - Cost of Capital for Layton Motors You have...Ch. 12 - Prob. 3CCCh. 12 - Prob. 4CCCh. 12 - Prob. 5CC
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