Showing 1000–1008 of 1959 results
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Eco Plastics Company Case Study
$10.00Since its inception, Eco Plastics Company has been revolutionizing plastic and trying to do its part to save the environment. Eoc s founder, Marion Cosby, developed a biodegradable plastic that her company is marketing to manufacturing companies throughout the southeastern United States. After operating as a private company for six years, Eco went public in 2009 and is listed on the Nasdaq stock exchange.
As the chief financial officer of a young company with lots of investment opportunities. Eco s CFO closely monitors the firm s cost of capital. The CEO keeps tabs on each of the individual cost of Eco s three main financing sources: long-term debt, preferred stock, and common stock. The target capital structure for ECO is given by the weights in the following table:
Source of capital Weight Long-term debt 30% Preferred stock 20 Common stock equity 50 Total 100% As the present time, Eco can raise debt by selling 20-year bonds with a $1,000 par value and a 10.5% annual coupon interest rate. Eco s corporate tax rate is 40%, and its bonds generally require an average discount of $45 per bond and floatation cost of $32 per bound when being sold. Eco s outstanding preferred stock pays a 9% dividend and has a $95-per-shar par value. The cost of issuing and selling addional preferred stock is expected to be $7 per share. Because Eco is a young firm that requires lots of cash to grow it does not currently pay a dividend to common stock holders. To track the cost of common stock the CFO uses the capital asset pricing model (CAPM). The CFO and the firm s investment advisors believe that the appropriate risk-free rate is 4% and that the market s expected return equals 13%. Using data from 2009 through 2012, Eco s CFO estimates the firm s beta to be 1.3.
Although Eco s current target capital structure includes 20% preferred stock, the company is considering using debt financing to retire the outstanding preferred stock, thus shifting their target capital structure to 50% long-term debt and 50% common stock. If Eco shifts its capital mix from preferred stock to debt, its financial advisors expects its beta to increase to 1.5.
To Do
a. Calculate Eco s current after-tax cost of long-term debt.
b. Calculate Eco s current cost of preferred stock.
c. Calculate Eco s current cost of common stock.
d. Calculate Eco s current weighted average cost capital.
e. (1) Assuming that the debt financing costs do not change, what effect would a shift to a more highly leveraged capital structure consisting of 50% long-term debt, 0% preferred stock, and 50% common stock have on the risk premium for Eco s common stock? What would be Eco s new cost of common equity?
(2) What would be Eco s new weighted average cost of capital?
(3) Which capital structure-the original one or this one-seems better? Why?
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EX 6-3 Perpetual inventory using FIFO
$5.00EX 6-3 Perpetual inventory using FIFO
Beginning inventory, purchases, and sales data for portable DVD players are as follows:
April 1 Inventory 120 units at $39 6 Sale 90 units 14 Purchase 140 units at $40 19 Sale 110 units 25 Sale 45 units 30 Purchase 160 units at $43 The business maintains a perpetual inventory system, costing by the first-in, first-out method.
a. Determine the cost of the merchandise sold for each sale and the inventory balance after each sale.
b. Based upon the preceding data, would you expect the inventory to be higher or lower using the last-in, first-out method?
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21st Century Cat variance of cash flows
$5.0021st Century Cat is a film producing company which is contemplating the production of a new film. They estimate that:The production of the film will require an investment of £300,000 in year 0.The distribution will generate a stream of cash flows equal to £200,000 in year 1, and£100,000 in each of years 2 and 3.In year 3, the producer will sell the rights to a tv broadcaster for £90,000.Distribution costs will be £75,000 in year 1, and £50,000 in each of years 2 and 3.Due to regulation aimed at promoting cinema, all income generated by the project istax-free.
a. The company’s financial experts say that the appropriate discount factor for the project is 10%. Calculate the NPV using this discount factor and determine whether the project should be funded.
b. Assume now that the company has a debt/equity ratio equal to one. The company’s bonds yield a 6% return, the company’s beta is equal to 0.5, the market risk premium is 5%, while the risk-free rate is 3%. Calculate the NPV of the project with the new data.
c. The experts say that the discount factor you used in b. underestimates the risk of the project. They claim that there is high uncertainty on whether the new film will be a hit or not. The variance of cash flows is accordingly very high. The relatively low beta you employ fails to capture this. How would you reply to this comment? Give your answer in no more than 100 words.
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Kathleen Dancewear Co. has bought some new machinery at a cost of $1,250,000
$1.00Kathleen Dancewear Co. has bought some new machinery at a cost of $1,250,000. The impact of the new machinery will be felt in the additional annual cash flows of $375,000 over the next five years. What is the payback period for this project? If their acceptance period is three years, will this project be accepted?
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A thirty- year U. S. Treasury bond has a 4.0 percent interest rate.
$2.00A thirty- year U. S. Treasury bond has a 4.0 percent interest rate. In contrast, a ten- year Treasury bond has an interest rate of 2.5 percent. A maturity risk premium is estimated to be 0.2 percentage points for the longer maturity bond. Investors expect inflation to average 1.5 percentage points over the next ten years.
- Estimate the expected real rate of return on the ten- year U. S. Treasury bond.
- If the real rate of return is expected to be the same for the thirty- year bond as for the ten- year bond, estimate the average annual inflation rate expected by investors over the life of the thirty- year bond.
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The Bravo Company just paid an annual dividend of $4.00 per share…
$2.00The Bravo Company just paid an annual dividend of $4.00 per share. Due to a need to conserve cash, the dividend in one year will be cut to zero. Dividends per share are forecasted to be $1.50 in two years, $2.50 in three years, and $3.50 in four years. After four years, dividends are expected to grow at a constant rate forever. Investors in Bravo Company require a return of 12%. The current market price of Bravo’s stock is $30.66 per share.
Determine the constant growth rate in dividends after four years that would justify the current market price.
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Central City Construction (CCC) needs $3 million of assets to get started…
$3.00Central City Construction (CCC) needs $3 million of assets to get started, and it expects to have a basic earning power ratio of 20%. CCC will own no securities, so all of its income will be operating income. If it chooses to, CCC can finance up to 40% of its assets with debt, which will have an 7% interest rate.
Assuming a 40% tax rate on all taxable income, what is the difference between CCC’s expected ROE if it finances with 40% debt versus its expected ROE if it finances entirely with common stock? Round your answer to two decimal places
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An investment project has annual cash inflows of $4,900…
$5.00An investment project has annual cash inflows of $4,900, $3,400, $4,600, and $3,800, and a discount rate of 13 percent.
- a) What is the discounted payback period for these cash flows if the initial cost is $5,200?
- b) What is the discounted payback period for these cash flows if the initial cost is $7,300?
- c) What is the discounted payback period for these cash flows if the initial cost is $10,300?
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The Sopchoppy Motorcycle Company is considering an investment…
$10.00The Sopchoppy Motorcycle Company is considering an investment of $600,000 in a new motorcycle. They expect to increase sales in each of the next three years by $400,000, while increasing expenses by $200,000 each year. They expect that they can carve out a niche in the marketplace for this new motorcycle for three years, after which they intend to cease production on this motorcycle and sell the manu- facturing equipment for $200,000. Assume the equipment is depreci- ated at the rate of $200,000 each year. Sopchoppy’s tax rate is 40%.
- What are the net cash flows for each year of the motorcycle’s three-year life?
- What is the net present value of the investment if the cost of cap- ital is 10%?
- What is the net present value of the motorcycle investment if the cost of capital is 5%?
- What is the profitability index of this investment if the cost of capital is 5%?
- What is the payback period of the investment?
- What is the discounted payback period of the investment if the cost of capital is 5%?
- What is the internal rate of return of the investment?
- What is the modified internal rate of return of the motorcycle investment if the cash flows are reinvested at 5%?
- If the cost of capital is 10%, should Sopchoppy invest in this motorcycle?