CFIN
5th Edition
ISBN: 9781305661639
Author: Scott Besley, Eugene Brigham
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 3, Problem 11PROB
Summary Introduction
BR needs $115 million for construction. To raise the needed funds, the issuance cost is 8% of the total issue value. The market price of each share is $40. Calculate the number of outstanding shares.
Equity financing is the process of raising equity capital by issuing shares to investors due to short-term need or long-term goal or for the future growth of the firm.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
ABC Industries is considering a 3-year project that will cost $200 today followed by free cash flows to firm of $100 in year 1, $80 in year 2, and $160 in year 3. ABC has $1000 of assets with a debt ratio of 40.00%. ABC's before-tax cost of debt is 7.00% and its cost of equity is 12.00%. Suppose ABC pays a fee of$6 to the investment bankers who help them to raise the $120 Debt capital. Assuming the tax rate is 35.00% and that the flotation cost can be amortized (i.e. deducted) for tax purposes over the 3 year life of the project. The NPV of the project using the APV method, taking into account the flotation costs, is closest to:
$8.40
$11.34
$10.66
$7.72
albot Industries is considering launching a new product. The new manufacturing equipment will cost $18 million, and production and sales will require an initial $5 million investment in net operating working capital. The company's tax rate is 25%. Enter your answers as a positive values. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answers to two decimal places.
What is the initial investment outlay?
$ million
The company spent and expensed $150,000 on research related to the new project last year. What is the initial investment outlay?
$ million
Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.8 million after taxes and real estate commissions. What is the initial investment outlay?
$ million
Herriman Solutions needs $14.4 million to build a new assembly line. The company's target debt-equity ratio is 1.08. The flotation cost
for new equity is 10.2 percent, but the floatation cost for debt is only 5.7 percent. The company has sufficient resources to finance the
equity portion of the assembly line internally. What is the true cost of building the new assembly line after taking flotation costs into
account?
Total initial cost = $
Allowed aftemots 3
Item
Item
Item
Item
Show
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
- Outdoor Living needs $7.5 million to finance modifications to its production equipment because the design of its all-season tents has changed dramatically. The underwriters estimate that the firm could sell additional shares of stock at $14.50 a share with a 7.5 percent underwriting spread. This would be a firm commitment underwriting. The estimated issue costs are $121,000. How many shares of stock will Outdoor Living need to sell to finance this project? ALT.D 10 (D C or ALT.CN E10 (Mac)arrow_forwardMoxabl Inc. plans to buy land and build an assembly line for its expansion. The anticipated total cost of the land and structures is $0.65 million. The founder-owners of the company are reluctant to borrow money and prefer to set aside savings from profits to cover the cost. Management believes that the firm can set aside $650,000 a month to accumulate the capital necessary for this investment. The firm can earn 8 percent compounded monthly on the funds it saves. How long will it take for the firm to have sufficient capital to invest in this expansion? Assume that the cost of expansion remains constant over time.arrow_forwardTalbot Industries is considering launching a new product. The new manufacturing equipment will cost $20 million, and production and sales will require an initial $4 million investment in net operating working capital. The company's tax rate is 25%. Enter your answers as a positive values. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answers to two decimal places. What is the initial investment outlay? $ million The company spent and expensed $150,000 on research related to the new project last year. What is the initial investment outlay? $ million Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.4 million after taxes and real estate commissions. What is the initial investment outlay? $ millionarrow_forward
- Harris Inc. is a book publisher that is considering developing an e-reader. The project requires 270 ($ thousand) in capital expenditures upfront. The production will continue for two years, and the FCFs in years 1 and 2 are 150 and 170 (in $ thousand). The tax rate is 50%. The asset cost of capital for the book publishing industry is 8%. Harris’s cost of debt is 6%. Turbo Inc. is a public firm that sells e-readers. It has a debt-to-value ratio 1/2. Its equity cost of capital is 22% and its debt cost of capital is 4%. (a) What is the NPV of the project if it is entirely financed with equity (in $ thousand)?(Round to two decimal places.) (b) What is the NPV of the project if Harris maintains a fixed D/E ratio of 1/1 and finances the project with this D/E ratio (in $ thousand)?(Round to two decimal places.)arrow_forwardFuturistic Coiffures (FC) needs to raise $85,000 to purchase a new machine. FC knows its component costs of capital are rd = 5%, rps = 7%, rs = 11%, and re = 13%. FC maintains a capital structure that consists of 60 percent debt, 10 percent preferred stock, and 30 percent common equity. The firm’s marginal tax rate is 30 percent. If FC expects to generate $27,000 in retained earnings this year, what marginal cost of capital will it incur to raise the needed funds?arrow_forwardTannen Industries is considering an expansion. The necessary equipment would be purchased for $18 million, and the expansion would require an additional $2 million investment in net operating working capital. The tax rate is 40%. What is the initial investment outlay? Round your answer to the nearest dollar. Write out your answer completely. For example, 13 million should be entered as 13,000,000.$???? The company spent and expensed $10,000 on research related to the project last year. Would this change your answer? Why? No, last year's expenditure is considered a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. Yes, the cost of research is an incremental cash flow and should be included in the analysis. Yes, but only the tax effect of the research expenses should be included in the analysis. No, last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence,…arrow_forward
- 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 $61,500 per year. The firm’s cost of capital (discount rate) is 11%. 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 30% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. 1c. The firm is in the 30% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB…arrow_forwardeEgg 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 $61,500 per year. The firm’s cost of capital (discount rate) is 11%. The firm is in the 30% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB depreciation rate is 50% (i.e., 2 × 25%). In year four, record depreciation expense as the net book value (NBV) of the asset at the start of the year.arrow_forwardCamber Corporation has to decide if they can finance purchasing 10 new machines for all their manufacturing sites. The machines cost $1.73 million each, and the supplier agreed to the following payment terms, 40% upfront, and the remainder to be paid over 4 years at an annual rate of 12%.b) Critically discuss the effect of increasing the amount paid upfront when corporations make capital purchases, focusing on the benefits and drawbacksarrow_forward
- Van Nuys Company is considering the purchase of a new machine which will cost $7.370. The machine will provide revenues of $4,000 per year. The cash operating costs will be $2,000 per year. The new machine will have a useful life of six years. The company's cost of capital is 12 percent. Ignore income taxes. Should the company buy the new machine? Yes, because NPV=0 and IRR0 and IRR>Cost of Capital No, because NPV>0 and IRR0 and IRR>Cost of Capital O Yes, because NPV = IRR Question 4arrow_forwardLimited Corporation is looking to replace a machine that is expected to increase productivity and, thereby, revenue. The cost of the machine is $100,000. Revenue is expected to increase by $20,000 in the first year, $50,000 in the second year, and $80,000 in the third year. After the third year, the company plans substitute the machine with a higher performance one. The alternative to this investment is to buy $100,000 in risky corporate bonds that currently yield 10% annually. Explain the feasibility of this project by computing the NPV.arrow_forwardeEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $60,000 to purchase and install and $30,000 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 $62,000 per year. The firm's cost of capital (discount rate) is 9%. 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 25% income tax bracket and uses straight-line (SLN) depreciation with no salvage value. Assume MACRS rules do not apply. 1c. The firm is in the 25% income tax bracket and uses double-declining-balance (DDB) depreciation with no salvage value. Given a four-year life, the DDB…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Discounted cash flow model; Author: Edspira;https://www.youtube.com/watch?v=7PpWneOBJls;License: Standard YouTube License, CC-BY