Here are book- and market-value balance sheet the United Frypan Company (figures in $ millions): Book-Value Balance Sheet Net working capital $ 40 Debt $ 30 Long-term assets 60 Equity 70 $ 100 $ 100 Market-Value Balance Sheet Net working capital $ 40 Debt $ 30 Long-term assets 195 Equity 205 $ 235 $ 235 Assume that MM’s theory holds except for taxes. There is no growth, and the $30 of debt is expected to be permanent. Assume a 21% corporate tax rate. b. What is United Frypan’s after-tax WACC if rDebt = 7.0% and rEquity = 16.0%? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. Now suppose that Congress passes a law that eliminates the deductibility of interest for tax purposes after a grace period of 5 years. What will be the new value of the firm, other things equal? Assume a borrowing rate of 7.0%. (Do not round intermediate calculations. Enter your answer in million rounded to 2 decimal places.)

Max Laboratories Inc. has been operating for over thirty years producing medications and food for pets and farm animals. Due to new growth opportunities they are interested in your expert opinion on a series of issues described below. The firm has a target capital structure of 40 percent debt and 60 percent common equity, which the CFO considers to be the optimal capital structure and plans to maintain it in the future. Next year the firm forecasts Earnings per share (EPS) of $15. Max Labs has One million common shares outstanding. The firm has a line of credit at the local bank at the following interest rates: Can borrow up to $6,000,000 at an 8% interest rate; the rate goes to 10% for amounts above $6,000,000. The firm’s interest subsidy tax rate is 25 percent. The firm plans to retain 70% of the forecasted Net income; the remaining 30% of the estimated profits will be paid as dividends to common shareholders next year. Currently common shares sell for $110 and the expected earnings growth is 9%. The floatation costs to raise new common equity capital, equal 7% of the share price. 1. Estimate the weighted average costs of capital for Max Laboratories: A) After-tax cost of debt. B) Cost of equity. C) Cost of new equity. 2. Calculate all of the Marginal cost of capital break points. Show the amount of total capital and how much would be raised from Common Equity and Debt at each point. A) Before the firm has to raise new equity. B) With the cost of new common equity but before the firm has to borrow at the higher interest rate. C) With New cost of equity and at the most expensive cost of debt. 3. Calculate the Weighted average cost of capital at all the break points found on Question 2 above. A) Before the firm has to raise new equity. B) With the cost of new common equity but before the firm has to borrow at the higher interest rate. C) With New cost of equity and at the most expensive cost of debt.

Suppose that XYZ Corp is considering financing a project with only equity. The project’s unlevered cost of capital is 10%. The project will require a $1000 initial investment today and pay incremental free-cash-flows of $100 in perpetuity starting the end of the next year. If the firm were to finance the project with debt so that its D/E ratio is 0.50 how will the NPV of the project change? Assume the interest rate on the new debt will be 3%, and the firm faces a 21% tax rate. Round your answer to two decimals.

You have an outstanding student loan with required payments of $ 500$500 per month for the next four years. The interest rate on the loan is 9 %9% APR​ (compounded monthly). Now that you realize your best investment is to prepay your student​ loan, you decide to prepay as much as you can each month. Looking at your​ budget, you can afford to pay an extra $ 150$150 a month in addition to your required monthly payments of $ 500$500​, or $ 650$650 in total each month. How long will it take you to pay off the​ loan? ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.)

Your firm has taken out a $ 492 comma 000$492,000 loan with 8.2 %8.2% APR​ (compounded monthly) for some commercial property. As is common in commercial real​ estate, the loan is a 55​-year loan based on a 1515​-year amortization. This means that your loan payments will be calculated as if you will take 1515 years to pay off the​ loan, but you actually must do so in 55 years. To do​ this, you will make 5959 equal payments based on the 1515​-year amortization schedule and then make a final 60th payment to pay the remaining balance.  ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.) a. What will your monthly payments​ be? b. What will your final payment​ be?

Use the following information for the next 2 questions:

Megatron Corp. estimates their future free cash flows as followed:

Year 1: $7,000; Year 2: $6,500; Year 3: $8,900; and they expect a 6% growth rate beyond year 3. If investors require 15% return, what is their current total company value (V0)?

Question 2 options:

Lakonisho Equipment has an investment opportunity in Europe. The project costs €10.5 million and it is expected to produce cash flows of €1.7 million, €2.4 million, and €3.3 million, for years 1, 2 and 3 respectively. The current spot exchange rate is $1.36/€; the current risk-free rate in the United States is 2.3%, compared to that in Europe of 1.8%. The appropriate discount rate for the project is estimated to be 13%, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of the 3 years for an estimated €7.5 million. What is the NPV of the project? What is the IRR of the project? Should Lakonisho Invest in this project?

Suppose the spot rate of Polish Zloty to the US dollar is 4.0 and the forward rate in the 180 day market of the Polish Zloty is 3.5 per dollar. The Polish Zloty is then selling at a _____________ to the spot rate. Express your answer as a decimal not a percentage.

Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Yeatman Co.: Yeatman Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 Unit sales 4,200 4,100 4,300 4,400 Sales price $29.82 $30.00 $30.31 $33.19 Variable cost per unit $12.15 $13.45 $14.02 $14.55 Fixed operating costs $41,000 $41,670 $41,890 $40,100 This project will require an investment of $20,000 in new equipment. Under the new tax law, the equipment is eligible for 100% bonus deprecation at t = 0, so it will be fully depreciated at the time of purchase. The equipment will have no salvage value at the end of the project’s four-year life. Yeatman pays a constant tax rate of 25%, and it has a weighted average cost of capital (WACC) of 11%.

Determine what the project’s net present value (NPV) would be under the new tax law.

Determine what the project’s net present value (NPV) would be under the new tax law. $53,579

$59,532

$47,626

$71,438

Now determine what the project’s NPV would be when using straight-line depreciation. Using the depreciation method will result in the highest NPV for the project.

No other firm would take on this project if Yeatman turns it down. How much should Yeatman reduce the NPV of this project if it discovered that this project would reduce one of its division’s net after-tax cash flows by $700 for each year of the four-year project?

$1,303

$1,629

$2,172

$2,389

Yeatman spent $1,750 on a marketing study to estimate the number of units that it can sell each year. What should Yeatman do to take this information into account?

Increase the NPV of the project $1,750.

Increase the amount of the initial investment by $1,750.

The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost.

Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Party Supply. Happy Times currently has debt outstanding with a market value of $180 million and a YTM of 9 percent. The company’s market capitalization is $420 million, and the required return on equity is 14 percent. Joe’s currently has debt outstanding with a market value of $32.5 million. The EBIT for Joe’s next year is projected to be $16 million. EBIT is expected to grow at 10 percent per year for the next five years before slowing to 3 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 9 percent, 15 percent, and 8 percent, respectively. Joe’s has 2.05 million shares outstanding, and the tax rate for both companies is 38 percent.

a. What is the maximum share price that Happy Times should be willing to pay for Joe’s? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) Maximum share price $ 36.97 36.97 Correct

After examining your analysis, the CFO of Happy Times is uncomfortable using the perpetual growth rate in cash flows. Instead, she feels that the terminal value should be estimated using the EV/EBITDA multiple. The appropriate EV/EBITDA multiple is 8.

b. What is your new estimate of the maximum share price for the purchase? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) Maximum share price $ 62.93 62.93 Incorrect

Q6) A stock had the following annual returns: 5.10% , 20.17% , -24.68% , and 26.60%. Compute the following for the stock:

a) Expected Return :

b) Variance :  

c) Standard Deviation :

Assume Hogan Surgical Instruments Company has $2,000,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 18 percent, but with a high-liquidity plan, the return will be 14 percent. If the firm goes with a short-term financing plan, the financing costs on the $2,000,000 will be 10 percent; with a long-term financing plan, the financing costs on the $2,000,000 will be 12 percent. (Review Table 6-11 for parts a, b, and c of this problem.)

Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixed assets total $3 million, and the firm plans to maintain a 45% debt-to-assets ratio. Rentz's interest rate is currently 9% on both short-term and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 10% of total sales, and the federal-plus-state tax rate is 40%.

What is the expected return on equity under each current assets level? Round your answers to two decimal places.

Restricted policy %

Moderate policy %

Relaxed policy %

In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption?

No, this assumption would probably not be valid in a real world situation. A firm's current asset policies may have a significant effect on sales.

Yes, this assumption would probably be valid in a real world situation. A firm's current asset policies have no significant effect on sales.

Yes, sales are controlled only by the degree of marketing effort the firm uses, irrespective of the current asset policies it employs.

Yes, the current asset policies followed by the firm mainly influence the level of long-term debt used by the firm.

Yes, the current asset policies followed by the firm mainly influence the level of fixed assets.

How would the firm's risk be affected by the different policies? The input in the box below will not be graded, but may be reviewed and considered by your instructor.