The RRK buyout fund is considering an investment in a fertilizer distribution center. The stock currently trades at $21 per share with 150,800,000 shares outstanding. RRK offers $26 per share, 75% of which is funded by high-yield debt securities. The fund believes it can work with management to grow the firm at a rate of about 5% while also retiring half of the high-yield debt by an expected exit in year 6, reinvesting any profit in growth and debt reduction. What is the expected IRR of this investment? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. IRR 38.15%
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- Farmers Alliance Limited is considering investing in new equipment with the initial cost of project/investment to be $100,000. This project is expected to generate EBIT of $15,000 per year forever (perpetuity). This project or investment can be financed either with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt and $60,000 equity. The shareholders required return on an all equity financed project in this risk class is 10%. The firm's marginal tax rate is 40%. The cost of any debt is 5% before taxes. Note that in the world of Modigliani & Miller, all cash flows are perpetual and debt does not mature.Required: (iii) Use the weighted average cost of capital method to value the project. What is the value of equity? What is the value of debt?Farmers Alliance Limited is considering investing in new equipment with the initial cost of project/investment to be $100,000. This project is expected to generate EBIT of $15,000 per year forever (perpetuity). This project or investment can be financed either with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt and $60,000 equity. The shareholders required return on an all equity financed project in this risk class is 10%. The firm's marginal tax rate is 40%. The cost of any debt is 5% before taxes. Note that in the world of Modigliani & Miller, all cash flows are perpetual and debt does not mature. Required: (i) if the project is financed entirely by equity, how much would be its net worth? ii) what is the adjusted net worth of the project iii) Use the weighted average cost of capital method to value the projectFarmers Alliance Limited is considering investing in new equipment with the initial cost of project/investment to be $100,000. This project is expected to generate EBIT of $15,000 per year forever (perpetuity). This project or investment can be financed either with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt and $60,000 equity. The shareholders required return on an all equity financed project in this risk class is 10%. The firm's marginal tax rate is 40%. The cost of any debt is 5% before taxes. Note that in the world of Modigliani & Miller, all cash flows are perpetual and debt does not mature.Required: (i) Use the flow to equity method to calculate the value of the project’s net worth to equity holders.
- Farmers Alliance Limited is considering investing in new equipment with the initial cost of project/investment to be $100,000. This project is expected to generate EBIT of $15,000 per year forever (perpetuity). This project or investment can be financed either with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt and $60,000 equity. The shareholders required return on an all equity financed project in this risk class is 10%. The firm's marginal tax rate is 40%. The cost of any debt is 5% before taxes. Note that in the world of Modigliani & Miller, all cash flows are perpetual and debt does not mature.Required 1. Compare and contrast the strengths and weaknesses of the adjusted present value, weighted average cost of capital, and flow to equity approaches to investment appraisal. Which method, in your opinion, is the best? Explain.Farmers Alliance Limited is considering investing in new equipment with the initial cost of project/investment to be $100,000. This project is expected to generate EBIT of $15,000 per year forever (perpetuity). This project or investment can be financed either with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt and $60,000 equity. The shareholders required return on an all equity financed project in this risk class is 10%. The firm's marginal tax rate is 40%. The cost of any debt is 5% before taxes. Note that in the world of Modigliani & Miller, all cash flows are perpetual and debt does not mature.Required: 1. If the project is financed entirely by equity, how much would be its net worth?Farmers Alliance Limited is considering investing in new equipment with the initial cost of project/investment to be $100,000. This project is expected to generate EBIT of $15,000 per year forever (perpetuity). This project or investment can be financed either with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt and $60,000 equity. The shareholders required return on an all equity financed project in this risk class is 10%. The firm's marginal tax rate is 40%. The cost of any debt is 5% before taxes. Note that in the world of Modigliani & Miller, all cash flows are perpetual and debt does not mature.Required: (ii) What is the adjusted net worth of the project?
- Kohwe Corporation plans to issue equity to raise $50.7 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10.4 million each year. Kohwe's only asset is this investment opportunity. Suppose the appropriate discount rate for Kohwe's future free cash flows is 7.7%, and the only capital market imperfections are corporate taxes and financial distress costs. a. What is the NPV of Kohwe's investment? b. What is the value of Kohwe if it finances the investment with equity? a. What is the NPV of Kohwe's investment? The NPV of Kohwe's investment is $ million. (Round to two decimal places.) b. What is the value of Kohwe if it finances the investment with equity? The Kohwe finances stment with equity $ million. (Round decimal places.)15. Sanitorium Brewing Company (SBC) must set its investment and dividend/repurchases policies for next year. It has 900,000 shares and its expected share price next year is $32.00. It can select from three independent projects, each of which will require a $3.5M investment. The projects have different risk levels, so SBC is appropriately evaluating them using different costs of capital. Assuming normal cashflows, the projected IRRS and costs of capital follow: Cost of Capital IRR 20% Project A: Project B: Project C: 17% 13% 10% 7% 9% SBC wants to maintain its 40% debt and 60% common equity capital structure, and it expects net income of $5.0M next year. If SBC also keeps its residual dividend policy (with all distributions as dividends, not share repurchases), what will its payout ratio be next year?The Hartley Hotel Corporation is planning a major expansion. Hartley is financed 100 percent with equity and intends to maintain this capital structure after the expansion. Hartley’s beta is 0.8. The expected market return is 15 percent, and the risk-free rate is 8 percent. If the expansion is expected to produce an internal rate of return of 14 percent, should Hartley make the investment? Round your answer to one decimal places. Based on the cost of capital of ________ %, Hartley should invest ____ or not invest ______
- Apex Corporation’s economic unit estimates that the probability of a good business environment next year is equal to the probability of a bad environment. Knowing that, the managers of Apex must choose between two mutually exclusive projects, project A and project B, which will provide the only assets of the firm. Apex has outstanding a zero coupon bond with a face value of $300m, maturing next year, when the project chosen will have its only payoff. The firm has currently available cash of $200m. Project A requires an initial investment of $100m, while project B requires $200m; final payoffs one year from now are: State of the economy: Good. Bad Probability: 1/2 1/2 Project A 400m 300m Project B 800m. 50mAlpha Industries is considering a project with an initial cost of $8.4 million. The project will profuce cash inflows of $1.64 million per year for 8 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.73 percent and a cost of equity of 11.35 percent. The debt-equity ratio is .64 and the tax rate is 39 percent. What is the net present value of the project?Slobe Telecom is considering a project for the coming year that will cost P50 million. Slobe plans to use the following combination of debt and equity to finance the the investment: a. Issue P15 million of 20-year bond at a price of 101, with a coupon rate of 8%, and floatation costs of 2% of par. b. Use P35 million of funds generated from earnings. The equity market is expected to earn 12%. US treasury bonds are currently yielding 5%. The beta coefficient of Slobe is estimated to be .60. Slobe is subject to to an effective tax rate of 40%. The before-tax cost of Slobe's planned debt financing , net of flotation costs, in the first year is ________. Assume the after-tax costs of debt is 7% and the cost of equity is 12%. The WACC must be _______. The company's expected rate of return under the CAPM must be ________.