Suppose the corporate tax rate is 25 %. Consider a firm that earns $ 1 comma 000 in earnings before interest and taxes each year with no risk. The​ firm's capital expenditures equal its depreciation expenses each​ year, and it will have no changes to its net working capital. The​ risk-free interest rate is 5 %. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the​ firm's equity? b. Suppose instead the firm makes interest payments of $ 200 per year. What is the value of​ equity? What is the value of​ debt? c. What is the difference between the total value of the firm with leverage and without​ leverage? d. To what percentage of the value of the debt is the difference in part ​(c​) ​equal?

Black Diamond, Inc., a manufacturer of carbon and graphite products for the aerospace and transportation industries, is considering several funding alternatives for an investment project. To finance the project, the company can sell 1,000 15-year bonds with a $1,000 face value, 7% coupon rate. The bonds require an average discount of $50 per bond and flotation costs of $40 per bond when being sold. The company can sell 5,000 shares of preferred stock that will pay a $2 dividend per share at a price of $40 per share. The cost of issuing and selling preferred stocks is expected to be $5 per share. To calculate the cost of common stock, the company uses the dividend discount model. The firm just paid a dividend of $3 per common share. The company expects this dividend to grow at a constant rate of 3% per year indefinitely. The flotation costs for issuing new common shares are 7%. The company plans to sell 10.000 shares at a price of $50 per share. The company's tax rate is 40%. a) Calculate the company's after-tax cost of long-term debt b) Calculate the company's cost of preferred equity c) Calculate the company's cost of common equity d) Calculate the company's weighted average cost of capital e) What is the company's weighted average cost of capital without flotation costs?

Williamson Industries has $4 billion in sales and $1 billion in fixed assets. Currently, the company's fixed assets are operating at 95% of capacity.

Rackin Pinion Corporation’s assets are currently worth $1,240. In one year, they will be worth either $1,200 or $1,490. The risk-free interest rate is 7 percent. Suppose the company has an outstanding debt issue with a face value of $1,000. a. What is the value of the equity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Equity value $ b-1 What is the value of the debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Debt value $ b-2 What is the interest rate on the debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number, e.g., 32.) Interest rate % c. Would the value of the equity go up or down if the risk-free rate were 8 percent? Increase Decrease

The price of Swearengen, Inc., stock will be either $73 or $95 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 4 percent. a. Suppose the current price of the company's stock is $84. What is the value of the call option if the exercise price is $69 per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Call value $ b. Suppose the current price of the company's stock is $84. What is the value of the call option if the exercise price is $79 per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Call value $ HintsReferenceseBook & Resources Hint #1

You must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, is $154,000, and the equipment will be fully depreciated at the time of purchase. The machine would be sold after 3 years for $46,000. The machine would require a $9,000 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $43,000 per year. The marginal tax rate is 25%, and the WACC is 11%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine. How should the $4,500 spent last year be handled? The cost of research is an incremental cash flow and should be included in the analysis. Only the tax effect of the research expenses should be included in the analysis. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay. Last year's expenditure is considered an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. Last year's expenditure is considered a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. What is the initial investment outlay for the machine for capital budgeting purposes after the 100% bonus depreciation is considered, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar. $ What are the project's annual cash flows during Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar. Year 1: $ Year 2: $ Year 3: $ Should the machine be purchased?

Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The assets required for the project were fully depreciated at the time of purchase. The financial staff has collected the following information on the project: Sales revenues $25 million Operating costs 20 million Interest expense 2 million The company has a 25% tax rate, and its WACC is 10%. Write out your answers completely. For example, 13 million should be entered as 13,000,000. What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest dollar. $ If this project would cannibalize other projects by $1.5 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest dollar. The firm's OCF would now be $ .

1. Bad Boys, Inc. is evaluating its cost of capital. Under consultation, Bad Boys, Inc. expects to issue new debt at par with a coupon rate of 8% and to issue new preferred stock with a $2.50 per share dividend at $25 a share. The common stock of Bad Boys, Inc. is currently selling for $20.00 a share. Bad Boys, Inc. expects to pay a dividend of $1.50 per share next year. An equity analyst foresees a growth in dividends at a rate of 5% per year. The Bad Boys, Inc. marginal tax rate is 35%. If Bad Boys, Inc. raises capital using 45% debt, 5% preferred stock, and 50% common stock, what is Bad Boys, Inc.’s cost of capital?
   
2. If Bad Boys, Inc. raises capital using 30% debt, 5% preferred stock, and 65% common stock, what is Bad Boys, Inc.’s cost of capital?

New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $1,160,000, and it would cost another $19,000 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $558,000. The machine would require an increase in net working capital (inventory) of $12,500. The sprayer would not change revenues, but it is expected to save the firm $410,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 35%. What is the Year 0 net cash flow?

What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations.

Round your answers to the nearest dollar.

Year 1 $ =

Year 2 $ =

Year 3 $=

What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)?

Do not round intermediate calculations. Round your answer to the nearest dollar. $ If the project's cost of capital is 11 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar. $ Should the machine be purchased?

Delia Landscaping is considering a new 4-year project. The necessary fixed assets will cost $169,000 and be depreciated on a 3-year MACRS and have no salvage value. The MACRS percentages each year are 33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. The project will have annual sales of $104,000, variable costs of $27,600, and fixed costs of $12,200. The project will also require net working capital of $2,800 that will be returned at the end of the project. The company has a tax rate of 34 percent and the project's required return is 9 percent. What is the net present value of this project?