The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 3% per year. Callahan's common stock currently sells for $27.25 per share; its last dividend was $2.00; and it will pay a $2.06 dividend at the end of the current year.
Using the DCF approach, what is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.
If the firm's beta is 0.6, the risk-free rate is 4%, and the average return on the market is 12%, what will be the firm's cost of common equity using the CAPM approach? Round your answer to two decimal places.
If the firm's bonds earn a return of 10%, based on the bond-yield-plus-risk-premium approach, what will be rs? Use the midpoint of the risk premium range discussed in Section 10-5 in your calculations. Round your answer to two decimal places.
If you have equal confidence in the inputs used for the three approaches, what is your estimate of Callahan's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.
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How to treat and define sunk costs, opportunity costs, and cannibalized sales. Also, which of these items should be considered (or ignored) when estimating cash flows in a capital budgeting decision?
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How to calculate the WACC? How to treat the tax consequence of debt in the calculation? Example please, No Excel
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Your firm currently has $64 million in debt outstanding with a 6% interest rate. The terms of the loan require it to repay $16 million of the balance each year. Suppose the marginal corporate tax rate is 35%,and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt?The present value of the interest tax shields is
$nothing
million. (Round to two decimal places.)
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Question Three
Explain why the discount rate for the time preference method is different than the discount rate for the social opportunity cost of capital. For a public project with a very long time period (say 40 years) and very high initial capital costs, show how the discount rate can have a major impact on the social NPV. (give a numerical example of each method)
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The City of Calgary is considering the construction of a new high school in order to accommodate a growing population. Before they proceed, they would like to conduct a Benefit/Cost analysis using different time horizons and interest rates. An economist for the City has tabulated the following benefits and costs in the table below.
|
Building costs (design, planning and construction) |
$9,000,000 |
|
Land costs |
1,000,000 |
|
Initial cost for roads and parking facilities |
5,000,000 |
|
Initial cost for parking facilities |
500,000 |
|
Initial cost to furnish and equip building |
500,000 |
|
Annual operating and maintenance costs |
650,000 |
|
Annual savings from busing students |
300,000 |
|
Annual benefits to community* |
1,600,000 |
|
Estimated annual cost of congestion |
100,000 |
|
Estimated annual cost due to loss of property values |
300,000 |
*This value was estimated by a City survey. The survey asked people their willingness to pay for a high school in their neighbourhood.
a) Calculate the NPV with interest rates of 3 percent, 5 percent
and 8 percent and with time horizons at 30 and 60 years. Comment on
how different interest rates and time horizons affect the economic
value of this public project.
(Note: Show your calculation for one NPV. You do not need to show
them for each one)
b) For someone working on the Calgary School Board, (a Spender) what interest and time horizon would they be promoting?
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You have a 3-year maturity, 5% coupon bond traded at par. If the interest rate were to increase by 125 basis points, your predicted new price for the bond based on duration only is _________ (round to the nearest dollar).
$955
$966
$1,000
$1,042
None of the above
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A company is considering purchasing a new technology that requires an initial capital
investment of $9,000. Annual revenues from the technology are predicted to be $6,500, and
annual expenses will be $4,000. The equipment has an estimated life of 11 years, at which time
the salvage value is expected to be $1,000. The MARR for the company is 15%.
a. Using the annual worth (AW) method, determine whether purchasing the equipment is
economically justified.
b. Repeat part (a) using the internal rate of return (IRR) method.
c. Using the present worth (PW) method, determine the break-even time period after which
purchase of the equipment generates a profit. (Find N when PW = 0)
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The unpaid balance at the start of a 28-day billing cycle was $990.01. A $6,000 purchase was made on the first day of the billing cycle and a $100 payment was credited to the account on day 21. How much interest will be charged at the end of the billing cycle? Assume that the annual interest rate on a credit card is 24.07% and interest is calculated by the average daily balance method.
At the end of the billing cycle, $_______ will be charged in interest.
(Round to the nearest cent as needed)
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|
The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial outflow of $6,500 and has an expected life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions:
BPC has decided to evaluate the riskier project at 12% and the less-risky project at 9%.
|
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The Dauten Toy Corporation uses an injection molding machine that was purchased prior to the new tax legislation. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is $2,100, and it can be sold for $2,400 at this time. Thus, the annual depreciation expense is $2,100/6 = $350 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of $9,000, an estimated useful life of 6 years, and an estimated salvage value of $800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase. The replacement machine would permit an output expansion, so sales would rise by $800 per year; even so, the new machine's much greater efficiency would cause operating expenses to decline by $1,500 per year. The new machine would require that inventories be increased by $2,000, but accounts payable would simultaneously increase by $800. Dauten's marginal federal-plus-state tax rate is 25%, and its WACC is 11%. What is the NPV of the incremental cash flow stream? Negative
value, if any, should be indicated by a minus sign. Round your
answer to the nearest cent. Should the company replace the old machine? |
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The price of a home is $200,000. The bank requires a 15% down payment. The buyer is offered two mortgage options: 15-year fixed at 8% or 30-year fixed at 8%. Calculate the amount of interest paid for each option. How much does the buyer save in interest with the 15-year option?
find the monthly payment for the 15-year option
find the monthly payment for the 30-year
Calculate the total cost of interest for both mortgage options. How much does the buyer save in interest with the 15-year option?
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