FINE 2000 Lecture Notes - Lecture 13: Weighted Arithmetic Mean, Capital Asset, Cash Flow

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mag0sea

10 Jan 2017

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The projected rate of return is 4. 5/30 = 15% If the cost of capital is less than the 15% expected return, expansion would be a good deal and would generate net value for geothermal and its shareholders. Recall the cost of capital is the return that investors expect and the rate of return depends on the risk. Produce a perpetual after tax cash flow of . 5 million. 0 = -30 + 4. 5/r rearrange to find r (irr) Capital structure the fi(cid:396)(cid:373)"s (cid:373)i(cid:454) of de(cid:271)t a(cid:374)d e(cid:395)uit(cid:455) fi(cid:374)a(cid:374)(cid:272)i(cid:374)g. Cost of capital the (cid:396)etu(cid:396)(cid:374) the fi(cid:396)(cid:373)"s i(cid:374)(cid:448)esto(cid:396)s (cid:272)ould e(cid:454)pe(cid:272)t to earn if they invested in securities with comparable risk. Calculate the company cost of capital for coolflow given the following capital structure, and assuming it pays 8% for debt and 14% for equity. Assu(cid:373)e the de(cid:271)t"s (cid:455)ieldi(cid:374)g 8 pe(cid:396)(cid:272)e(cid:374)t a(cid:374)d the e(cid:395)uit(cid:455) investors want 14%

Related Questions

Post your answers, including showing your work and how you got your answers to each question.

1. NCC Corporation is considering building a new facility in Texas. To raise money for the capital projects, the corporation plans the following capital structure: 30% of money will come from issuing bonds, and 70% will come from Retained Earnings or new common stock. The corporation does not currently have preferred stock. NCC Corporation will issue bonds with an interest rate of 8% up to $30 million dollars in bonds. After issuing $30 million in bonds, the interest cost will rise to 12.5%. The next dividend on common stock is expected to be $2.00 per share. The stock price is $25.00 per share, and is expected to grow at 3% per year. The flotation cost for issuing new common stock is estimated at 10%. NCC Corporation has $66 million in retained earnings that can be used. The tax rate for NCC Corporation is 35%.

A. What is the initial Weighed Average Cost of Capital (WACC) for NCC Corporation?

B. There are two breakpoints in NCC's capital structure. At what point does the first breakpoint occur?

C. At what point does the second breakpoint occur?

D. What is the Weighted Average Cost of Capital (WACC) after the first breakpoint?

E. What is the WACC after the second breakpoint?

F. The following projects are available for NCC Corporation to consider choosing.

	Cost	Cash Flow Each Year	IRR
Project A	$25 Million	$7 Millions for 5 Years	12.38%
Project B	$50 Million	$15 Millions for 5 Years	15.24%
Project C	$30 Million	$7.5 Million for 6 years	13%
Project D	$30 Million	$8.8 Million for 5 Years	14.29%
Project E	$40 Million	$11 Million for 5 years	11.65%

Which projects should NCC accept, if any, and in which order should they be chosen?

grayspider54

Wheel Industries is considering a three-year expansion project, Project A. The project requires an initial investment of $1.5 million. The project will use the straight-line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million per year before tax and has additional annual costs of $600,000. The Marginal Tax rate is 35%.

The firm has decided on a capital structure consisting of 30% debt and 70% new common stock. Calculate the WACC and explain how it is used in the capital budgeting process.
Calculate the after tax cash flows for the project for each year. Explain the methods used in your calculations.
If the discount rate were 6 percent calculate the NPV of the project. Is this an economically acceptable project to undertake? Why or why not?
Now calculate the IRR for the project. Is this an acceptable project. Why/why not? Is there a conflict between answer and the answer to #1

ultramarinecod331

Part 1: Your firm is an MNC headquartered in the United States. You have been tasked with estimating the weighted average cost of capital (WACC) given the following information:

â¢ Firmâs bond yield: 8%

â¢ Treasury rate: 3% â¢ Beta: 1.5

â¢ Expected market return: 11%

â¢ Target Capital Structure: 30% debt, 70% equity

â¢ Tax bracket: 35%

Part 2:

Texas Co. (TC) established a subsidiary in Russia two years ago. Under its original plans, TC intended to operate the subsidiary for a total of four years. Exchange forecasts suggest the ruble will likely depreciated from the current level of $0.033 to $0.028 to $0.025 over the next few years.TC could sell the subsidiary today for 5 million rubles to a potential acquirer. If TC continues to operate the subsidiary, it will generate cash flows of 3.5 million rubles next year and 4.5 million rubles in the following year. These cash flows would be remitted back to the parent in the U.S. The required rate of return of the project is 15 percent.

Should TC continue operating the Russian subsidiary?

redferret412

FINE 2000 Lecture Notes - Lecture 13: Weighted Arithmetic Mean, Capital Asset, Cash Flow

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