Question

In: Accounting

Question 1 Roger Corporation operating out of Mount Hope is seeking to determines it’s cost of...

Question 1

Roger Corporation operating out of Mount Hope is seeking to determines it’s cost of equity. Roger has an unlevered cost of capital of 10 percent, a tax rate of 25 percent, and expected EBIT of $8,500,000. Roger has $14,500,000 of Bond debt outstanding that pays a 8 percent coupon interest annually that is currently selling at par value. What is the cost of equity?

Question 2

Richard’s Enterprises expects its EBIT to be $138,000 every year forever. The firm can borrow at 9 percent. Richard currently has no debt, and its cost of equity is 9 percent. If the tax rate is 25 percent, what is the value of the firm? What will the value be if the company borrows $95,000 and uses the proceeds to repurchase shares?

Expert Solution

Solution to question no. 1

Calculation of Total Capital
	Amont in $
EBIT	8,500,000
Less: Tax @ 25%	2,125,000
After Tax Income	6,375,000
Cost of capital	10%
Total Capital (After tax Income / cost of capital)	63,750,000

Calculation of Cost of Equity
	Amont in $
Bonds	14,500,000
Interest rate on Bonds	8%
Interest amount	1,160,000

EBIT	8,500,000
Less: Interest on Bonds	1,160,000
Income before tax	7,340,000
Less: Tax @25%	1,835,000
After Tax Income (available for equity)	5,505,000

Total Capital (as calculated above)	63,750,000
Less: Bonds	14,500,000
Equity Investment	49,250,000

Cost of Equity (Return for equity / Equity Investment)	11.18%

Cost of equity is 11.18%

Solution to question no. 2

Richard's EBIT = $138,000

Tax rate = 25%

Earning after tax = Earning before tax - Tax

= $138,000 - (25% of $138,000) = $138,000 - $34,500 = $103,500

Cost of equity = 9%

then, Value of Firm = Earning available for equity / Cost of equity %

= $103,500 / 9%

= $1,150,000 (Value of Firm)

What will the value be if the company borrows $95,000 and uses the proceeds to repurchase shares:

Richard's EBIT = $138,000

Tax rate = 25%

Use $95,000 for purchase of shares.

Interest rate = 9%

Earning Before Tax = EBIT - Interest

= $138,000 - (9% on 95,000) = $138,000 - $8,550 = $129,450

Earning after tax = Earning before tax - Tax

= $129,450 - (25% of $129,450) = $129,450 - $32,362.50 = $97,087.50

then, Value of Firm = Earning available for equity / Cost of equity %

= $ 97,087.50 / 9%

= $1,078,050 (Value of Firm)

ekkarill92 answered 2 years ago

can someone show the work to this question Roger has a levered cost of equity of...

can someone show the work to this question Roger has a levered cost of equity of 0.18. He is thinking of investing in a project with upfront costs of $8 million, which pays $1 million per year for the next 8 years. He is going to borrow $2 million to offset the startup costs at a rate of 0.08. His tax rate is 0.3. He will repay this loan at the end of the project. What is the NPV of...

You open a restaurant and hope to entice customers by hanging out a sign (Figure 1)....

You open a restaurant and hope to entice customers by hanging out a sign (Figure 1). The uniform horizontal beam supporting the sign is 1.60 m long, has a mass of 20.0 kg , and is hinged to the wall. The sign itself is uniform with a mass of 33.0 kg and overall length of 1.20 m . The two wires supporting the sign are each 36.0 cm long, are 90.0 cm apart, and are equally spaced from the middle...

It’s July 1 and Joanna is just out of residency, with loans that she is able...

It’s July 1 and Joanna is just out of residency, with loans that she is able to pay off at a rate of $2000 per year. She has several job offers that would pay her $1000 a week, for jobs that she would like just as much as running her own office. But she has decided to open a clinic in her rural town and is about to sign a one-year lease for office space with rent of $800 a...

Question 1 A nurse is caring for a client in labor. The nurse determines that the...

Question 1 A nurse is caring for a client in labor. The nurse determines that the client is beginning in the 2nd stage of labor when which of the following assessments is noted? A The client begins to expel clear vaginal fluid B The contractions are regular C The membranes have ruptured D The cervix is dilated completely Question 2 A nurse in the labor room is caring for a client in the active phases of labor. The nurse is...

Question 1: Roger Harkel, CEO of Bestafer, Inc. seeks to raise $2 million in a private...

Question 1: Roger Harkel, CEO of Bestafer, Inc. seeks to raise $2 million in a private placement of equity in his early stage venture. Harkel conservatively projects net income of $5 million in year 5 and knows that comparable companies trade at a price earnings ratio of 20X. What share of the company would a venture capitalist require today if her required rate of return was 50%? What if her required rate of return was only 30%? If the company...

Question 1 The capital accounts of Hope and Indiana have balances of $230,000 and $190,000, respectively....

Question 1 The capital accounts of Hope and Indiana have balances of $230,000 and $190,000, respectively. Clint and Casey are to be admitted to the partnership. Clint buys one-fifth of Hope’s interest for $60,000 and one-fourth of Indiana’s interest for $40,000. Casey contributes $90,000 cash to the partnership, for which he is to receive an ownership equity of $90,000. Required: a. Journalize the entries to record the admission of Clint and Casey b. What are the capital balances of each...

Fill out chart a) A new operating system for an existing machine is expected to cost...

Fill out chart a) A new operating system for an existing machine is expected to cost $750,000 and have a useful life of six years. The system yields an incremental after-tax income of $195,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $22,400. b) A machine costs $470,000, has a $37,100 salvage value, is expected to last eight years, and will generate an after-tax income of $66,000 per year after straight-line depreciation. Assume...

1. The Dolan Corporation, a maker of small engines, determines that in 2011 the demand curve...

1. The Dolan Corporation, a maker of small engines, determines that in 2011 the demand curve for its products was P = 2,000 – 50 Q, where P is the price (in dollars) of an engine and Q is the number of engines sold per month. a. To sell 20 engines per month, what price would Dolan have to charge? b. If managers set the price at $500, how many engines will Dolan sell per month? c. What is...

Question 1 Thomson Corporation had the following operating results for 2019 (in 000’s): sales of $30,600;...

Question 1 Thomson Corporation had the following operating results for 2019 (in 000’s): sales of $30,600; cost of goods sold of $21,800; depreciation expense of $4,200; interest expense of $1,040; dividends paid of $1,000. At the beginning of the year, net fixed assets were $23,600, current assets were $6,800, and current liabilities were $3,800. At the end of the year, net fixed assets were $25,800, current assets were $7,900, and current liabilities were $3,900. Total taxes are $1,500 ($1,424 paid,...

The Wet Corporation contemplates the replacement of an old machinery. The annual cost of operating the...

The Wet Corporation contemplates the replacement of an old machinery. The annual cost of operating the old machinery is P138,600, excluding depreciation, while the estimate for the new machinery is P91,300. The cost of the new machinery is P160,000, net of the trade-in allowance, with an estimated useful life of 8 years, no residual value. The effective income tax rate of 40% and the cost of capital is 8%. The old machinery has an annual deprecation of P15,000 while the...