33:390:400 Lecture Notes - Lecture 2: Net Present Value, Capital Structure

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28 Jul 2021
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Chapter 13 Practice Problems
1. Calgary Industries, Inc., is considering a new project that costs
$25 million. The project will generate after-tax (year-end) cash
flows of $7 million for five years. The firm has a debt-to-equity
ratio of 0.75. The cost of equity is 15 percent and the cost of
debt is 9 percent. The corporate tax rate is 35 percent. It appears
that the project has the same risk of the overall firm. Should
Calgary take on the project?
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Document Summary

Chapter 13 practice problems: calgary industries, inc. , is considering a new project that costs. The project will generate after-tax (year-end) cash flows of million for five years. The firm has a debt-to-equity ratio of 0. 75. The cost of equity is 15 percent and the cost of debt is 9 percent. It appears that the project has the same risk of the overall firm. Calgary take on the project: a firm currently has million in stock and million in bonds and the beta on the firm"s stock is currently estimated to be 1. 0. There are no taxes: here is some data for three firms in the restaurant industry: Firm #1: million in debt, million in equity, current estimated equity beta of 3. 0. Firm #2: million in debt, million in equity, current estimated equity beta of 3. 0. Firm #3: million in debt, million in equity, current estimated equity beta of 4. 0.

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