FUND.OF CORP.FIN.(LL)-W/ACCESS >CUSTOM<
11th Edition
ISBN: 9781259898549
Author: Ross
Publisher: MCG CUSTOM
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 14, Problem 18QP
Calculating Flotation Costs [LO4] Suppose your company needs $24 million to build a new assembly line. Your target debt–equity ratio is .60. The flotation
a. What do you think about the rationale behind borrowing the entire amount?
b. What is your company’s weighted average flotation cost, assuming all equity is raised externally?
c. What is the true cost of building the new assembly line after taking flotation costs into account? Does it matter in this case that the entire amount is being raised from debt?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Suppose your company needs $10 million to build a new assembly line. Your target debt-equity ratio is 3.0. The flotation cost for new equity is 20%, but the flotation cost for debt is only 5%. Your boss has decided to fund the project by borrowing money, because the flotation costs are lower, and the needed funds are relatively small.
a) What do you think about the rationale behind borrowing the entire amount?
b) What is the true cost of building the new assembly line after taking flotation costs into account?
[6:46 am, 15/01/2022] Mahmoud: 19. Cost of Capital. Pollution Busters, Inc., is considering a purchase of 10 additional carbon sequesters for $100,000 apiece. The sequesters last for only 1 year until saturated with carbon. Then the carbon is removed and sold. (O LO4) a. Suppose the government guarantees the price of carbon. At this price, the payoff after 1 year is guaranteed to be $115,000. How would you determine the opportunity cost of capital for this investment? b. Suppose instead that the sequestered carbon has to be sold on the London Carbon Exchange. Carbon prices have been extremely volatile, but Pollution Busters' CFO learns that average rates of return from investment on that exchange have been about 20%. She thinks this is a reasonable forecast for the future. What is the opportunity cost of capital in this case? Is the purchase of an additional sequester a worthwhile capital investment if she expects that the price of extracted carbon will $115,000?
please show the strps
use excel/show all excel formulas answering the following
LO3 20. Sensitivity Analysis We are evaluating a project that costs $1.68 million, has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 90,000 units per year. Price per unit is $37.95, variable cost per unit is $23.20, and fixed costs are $815,000 per year. The tax rate is 21 percent, and we require a return of 11 percent on this project. a. Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales. b. What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a $1 decrease in estimated variable costs.
LO3 21. Scenario Analysis In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to…
Chapter 14 Solutions
FUND.OF CORP.FIN.(LL)-W/ACCESS >CUSTOM<
Ch. 14.1 - What is the primary determinant of the cost of...Ch. 14.1 - What is the relationship between the required...Ch. 14.2 - What do we mean when we say that a corporations...Ch. 14.2 - Prob. 14.2BCQCh. 14.3 - Why is the coupon rate a bad estimate of a firms...Ch. 14.3 - How can the cost of debt be calculated?Ch. 14.3 - How can the cost of preferred stock be calculated?Ch. 14.4 - Prob. 14.4ACQCh. 14.4 - Prob. 14.4BCQCh. 14.4 - Under what conditions is it correct to use the...
Ch. 14.5 - Prob. 14.5ACQCh. 14.5 - Prob. 14.5BCQCh. 14.6 - Prob. 14.6ACQCh. 14.6 - Why do you think we might prefer to use a ratio...Ch. 14.7 - What are flotation costs?Ch. 14.7 - How are flotation costs included in an NPV...Ch. 14 - A firm has paid dividends of 1.02, 1.10, 1.25, and...Ch. 14 - Prob. 14.3CTFCh. 14 - Why is the tax rate applied to the cost of debt...Ch. 14 - What approach to a projects costs of capital...Ch. 14 - What is the flotation cost of equity for a firm...Ch. 14 - WACC [LO3] On the most basic level, if a firms...Ch. 14 - Book Values versus Market Values [LO3] In...Ch. 14 - Project Risk [LO5] If you can borrow all the money...Ch. 14 - Prob. 4CRCTCh. 14 - DCF Cost of Equity Estimation [LO1] What are the...Ch. 14 - SML Cost of Equity Estimation [LO1] What are the...Ch. 14 - Prob. 7CRCTCh. 14 - Cost of Capital [LO5] Suppose Tom OBedlam,...Ch. 14 - Company Risk versus Project Risk [LO5] Both Dow...Ch. 14 - Divisional Cost of Capital [LO5] Under what...Ch. 14 - Calculating Cost of Equity [LO1] The Absolute Zero...Ch. 14 - Calculating Cost of Equity [LO1] The Graber...Ch. 14 - Calculating Cost of Equity [LO1] Stock in Daenerys...Ch. 14 - Estimating the DCF Growth Rate [LO1] Suppose...Ch. 14 - Prob. 5QPCh. 14 - Calculating Cost of Debt [LO2] Drogo, Inc., is...Ch. 14 - Calculating Cost of Debt [LO2] Jiminys Cricket...Ch. 14 - Prob. 8QPCh. 14 - Calculating WACC [LO3] Mullineaux Corporation has...Ch. 14 - Taxes and WACC [LO3] Lannister Manufacturing has a...Ch. 14 - Finding the Target Capital Structure [LO3] Famas...Ch. 14 - Book Value versus Market Value [LO3] Dinklage...Ch. 14 - Calculating the WACC [LO3] In Problem 12, suppose...Ch. 14 - WACC [LO3] Fyre, Inc., has a target debtequity...Ch. 14 - Prob. 15QPCh. 14 - Prob. 16QPCh. 14 - SML and WACC [LO1] An all-equity firm is...Ch. 14 - Calculating Flotation Costs [LO4] Suppose your...Ch. 14 - Calculating Flotation Costs [LO4] Caughlin Company...Ch. 14 - WACC and NPV [LO3, 5] Scanlin, Inc., is...Ch. 14 - Flotation Costs [LO4] Pardon Me, Inc., recently...Ch. 14 - Calculating the Cost of Debt [LO2] Ying Import has...Ch. 14 - Calculating the Cost of Equity [LO1] Epley...Ch. 14 - Adjusted Cash Flow from Assets [LO3] Ward Corp. is...Ch. 14 - Adjusted Cash Flow from Assets [LO3] In the...Ch. 14 - Prob. 26QPCh. 14 - Prob. 27QPCh. 14 - Flotation Costs and NPV [LO3, 4] Photochronograph...Ch. 14 - Flotation Costs [LO4] Sheaves Corp. has a...Ch. 14 - Project Evaluation [LO3, 4] This is a...Ch. 14 - Prob. 31QPCh. 14 - Prob. 1MCh. 14 - Cost of Capital for Swan Motors You have recently...Ch. 14 - Prob. 3MCh. 14 - Cost of Capital for Swan Motors You have recently...Ch. 14 - Cost of Capital for Swan Motors You have recently...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- P15–13 LOCKBOX SYSTEM Eagle Industries believes that a lockbox system can shorten its accounts receivable collection period by 3 days. Credit sales are $3,240,000 per year, billed on a continuous basis. The firm has other equally risky investments that earn a return of 15%. The cost of the lockbox system is $9,000 per year. (Note: Assume a 365-day year.) What amount of cash will be made available for other uses under the lockbox system? What net benefit (cost) will the firm realize if it adopts the lockbox system? Should it adopt the proposed lockbox system?arrow_forwardMf2. Your firm is considering choosing either Project X or Project Y with the following cash flows: Year: 0. 1 2 3 4 Project X -$150,000 $75,000. $65,000 55,000 $45,000 Project Y -$180,000 $90,000. $70,000 $70,000 $50,000 Between a discount rate of ______ and ______ you can be sure your firm should prefer Project Y to Project X. a. 0%; 14.16% b. 0%; 10.25% c.14.16%; 24.26% d10.25; 22.63% e. 0%; 25%arrow_forwardsuppose your company needs $43 million to build a new assembly line. your target debt-equity ratio is .75. the flotation cost for new equity is 6 percent, but the flotation cost for debt is only 2 percent. your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small.arrow_forward
- 5. Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project? a. The company has spent and expensed $1 million on R&D associated with the new project b. The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year c. The new project is expected to reduce sales of one of the company's existing products by 5%arrow_forwardCH5 #10 A company is considering two alternative marketing strategies for a new product. Introducing the product will require an outlay of $15,000. With a low price, the product will generate cash proceeds of $10,000 per year and will have a life of two years. With a high price, the product will generate cash proceeds of $18,000 but will have a life of only one year. The hurdle rate for this project is 0.05. Which marketing strategy should be accepted?arrow_forward6b) Kalvino Inc. has a new five-year project that produces high-end raincoats. The initial investment equals $85,000. The estimated selling price equals $102 per unit and variable costs equal $80 per unit. Fixed costs equal $29,000. Investors do require a 15% return. Calculate the cash break-even quantity? Interpret your answer. Calculate the accounting break-even quantity? Interpret your answer. Calculate the financial break-even quantity? Interpret your answer. What is the degree of operating leverage for this project? Assuming that sales are estimated at $249,900.arrow_forward
- 5. Risk analysis in capital budgeting Projects differ in risk, and risk analysis is a critical component of the capital budgeting process. Consider the case of United Recycling Inc.: United Recycling Inc. is one of the largest recyclers of glass and paper products in the United States. The company is looking into expanding into the cardboard recycling business. The company’s CFO has performed a detailed analysis of the proposed expansion. The selling price of recycled cardboard can fluctuate dramatically, depending on the market conditions. By creating models that used different assumptions for the selling price of recycled cardboard but keeping all other inputs in the model the same, the CFO demonstrated the effect of fluctuations in the price of recycled cardboard. A. Based on the information given, determine which of the statements is correct. The company’s CFO performed a scenario analysis on the project’s financial model. The company’s CFO was conducting a…arrow_forward(6.1) A firm is considering a new project. If the project goes ahead, it will require the use of an existing warehouse owned by the company. If the project does not go ahead, the warehouse could be immediately rented out for $5000 per month. In relation to the use of the warehouse, what is the incremental free cash flow (i.e. how many dollars is the firm better or worse off) from proceeding with the project? a. $5000 per month b. $60000 per year c. -$5000 per month d. $0 per month Clear my choicearrow_forwardshow all excel formulas/ work answering the following: LO2 27. Project Analysis You are considering a new product launch. The project will cost $780,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 170 units per year, price per unit will be $16,300, variable cost per unit will be $11,100, and fixed costs will be $535,000 per year. The required return on the project is 11 percent, and the relevant tax rate is 21 percent. a. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate within +10 percent. What are the best and worst cases for these projections? What is the base-case NPV? What are the best- case and worst-case scenarios? b. Evaluate the sensitivity of your base-case NPV to changes in fixed costs.arrow_forward
- Reconsider Example 11.6, where the expected cash flows for the Capstone project arePeriod 0 1 2 3 4 5Cash Flow -$55,000 $17,094 $20,439 $20,069 $20,212 $29,660Suppose that Capstone consider the MicroCHP project to be just one of their normal risky projects. Then the appropriate discount rate to use is 15%. However, Capstone considers the MicroCHP project to be much riskier than normal projects, so it believes an additional risk premium of 6.93% should be added. If management has decided to use a risk-adjusted discount rate of 21.93% to compensate for the uncertainty of the cash flows, is this project acceptable?arrow_forwardProject Evaluation [LO1] Dog Up! Franks is looking at a new sausage systemwith an installed cost of $460,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $55,000. The sausage system will save the firm $155,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $29,000. If the tax rate is 21 percent and the discount rate is 10 percent, what is the NPV of this project?arrow_forward14. Need help with this question asap please! A company is considering a project that would require a cash outflow in the amount of $1,000,000 at the beginning. The company expects the project to generate average annual cash inflows in the amount of $40,000. The average book value for the project is expected to be $250,000 and average annual net income is expected to be $55,000. The company requires a return of 15.25%. What is the average accounting return for this project?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY