Concept explainers
Flotation Costs and
1. A new issue of common stock: The flotation costs of the new common stock would be 8 percent of the amount raised. The required return on the company’s new equity is 14 percent.
2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 4 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 8 percent, they will sell at par.
3. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .15. (Assume there is no difference between the pretax and aftertax accounts payable cost.)
What is the NPV of the new plant? Assume that PC has a 35 percent tax rate.
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- 2 Net Present Value (NPV) Example 1 (Ross et al., 2023, pp. 299-300): We want to establish a new fertilizer business. The project costs $30,000 to launch. The project can generate cash revenues of $20,000 per year. The project will incur cash costs (including taxes) of $14,000 per year. The project will be terminated in 8 years and the project's assets can be sold for $2,000 at that time. A 15% discount rate is appropriate for this project. a. Should we undertake this project? b. If there are 1,000 shares of stock outstanding, what will be the effect on the price per share from taking the project?arrow_forward[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 strpsarrow_forwardA3 8aii You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 100 units per year, price per unit will be $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. Ignore the half-year rule for accounting for depreciation. a. Calculate the following six numbers for this project. Round your answers to two decimal places. (ii) Profitability Index (PI)arrow_forward
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