Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 19, Problem 18PS
Summary Introduction
To discuss: Whether the approach of the treasurer is wrong or right and whether the university should invest and borrow and the value of the project.
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OPTIMAL CAPITAL STRUCTURE
Assume that you have just been hired as business manager of Campus Deli(CD) , Which os located adjeacent to the campus. Sales were $1,100,000 last year variable costs were 60% of sales and fixed costs were $40,000. Therefore, EBIT totaled $400,000.
Because the university's enrollment is capped, EBIT is expected to be constant over time. Because no expansion capital is required, CD distributes all earnings as dividends. Invested capital is $2 million, and 80,000 shares are outstanding. The management group owns about 50% if the stock, which is traded in the over-the counter market.
CD currently has no debt-it is an all-equity firm- and its 80,000 shares outstanding sell at a price of $25 per share, which is also the book value. The firms federal-plus-state tax rate is 40% on the basis of statement made in your finance text, you belive that CD's shareholders would be better off if some debt financing were used. When you suggested this to your new boss, She…
A public university system wants to apply the concept of the WACC to developing its interest rate for analyzing capital projects. It has an endowment of $850 million which is earning 6.3% interest. It is paying 4.5% interest on $300 million in bonds. It believes that $120 million in general funds from the taxpayers should be assigned an interest rate of 13% What is the university’s cost of capital? Note that only new bonds or the interest on the endowment is available to fund capital projects.
Food and Health Company is expanding and has an average-risk project under consideration. The company decides to fund the project in the same manner as the company’s existing capital structure. The cost of debt is 9.00%, the cost of preferred stock is 12.00%, the cost of common stock is 16.00%, and the WACC adjusted for taxes is 11.50%.
Incremental cash flows:
Category
T0
T1
T2
T3
Investment
-$2,500,000
NWC
-$250,000
$250,000
Operating Cash Flow
$750,000
$750,000
$750,000
Salvage
$50,000
If the internal rate of return (IRR) of the project is estimated to be 11%, according to the IRR decision making rule, should this project be accepted? Why or why not?
Chapter 19 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 19.A - The U.S. government has settled a dispute with...Ch. 19.A - Prob. 2QCh. 19 - Prob. 1PSCh. 19 - Prob. 2PSCh. 19 - WACC True or false? Use of the WACC formula...Ch. 19 - Flow-to-equity valuation What is meant by the...Ch. 19 - APV True or false? The APV method a. Starts with a...Ch. 19 - APV A project costs 1 million and has a base-case...Ch. 19 - Prob. 7PSCh. 19 - APV Consider a project lasting one year only. The...
Ch. 19 - WACC The WACC formula seems to imply that debt is...Ch. 19 - Prob. 10PSCh. 19 - Prob. 11PSCh. 19 - WACC Table 19.4 shows a simplified balance sheet...Ch. 19 - WACC How will Rensselaer Felts WACC and cost of...Ch. 19 - APV Digital Organics (DO) has the opportunity to...Ch. 19 - APV Consider another perpetual project like the...Ch. 19 - Prob. 18PSCh. 19 - Prob. 19PSCh. 19 - Prob. 22PSCh. 19 - Company valuation Chiara Companys management has...Ch. 19 - Prob. 25PSCh. 19 - Prob. 26PS
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