You are thinking of starting a business. You would finance it with 60% equity and 40%...

You are thinking of starting a business. You would finance it with 60% equity and 40% debt.

Relevant rates are as follows:

Small business tax rate 18.62% Risk free rate 4% Your pre-tax borrowing rate 9.216% Expected return on stock market 12%

You estimate that your firm’s β (beta) will be 0.75.

The business you are thinking of starting is a house painting business. You hired a FINA2710 graduate to develop cash flow estimates for you and you have paid that FINA 2710 grad $300 for their work. They estimated that you would need to purchase a truck. You could buy a truck for $18,000, and it would have a capital cost allowance (CCA) rate of 30%. You would also need to establish a $250 inventory of rollers and brushes. The estimated annual pre-tax net operating cash inflow is $9,500.

a) What is the Net Present Value (NPV) of starting the business, operating it for 2 years, and after that keeping the truck but not the inventory?

b) What is the NPV of starting the business, operating it for 2 years, and then winding up all aspects of the business, including selling the truck for $10,000? (The business has no othet automotive assets). Show your calculations.

Expert Solution

Answer:

ekkarill92 answered 1 year ago

Step 1 Read the scenario. Assume you are thinking about starting a business and would like...

Step 1 Read the scenario. Assume you are thinking about starting a business and would like to forecast your cash needs for the next six months. You expect sales to be approximately $30,000 per month for the first 12 months and your purchases to support sales will be approximately 60% of sales. You anticipate about 20% of your sales will be cash and 80% collected the following month. Your supplier has agreed to extend credit for 70 days at no...

Dahmen plc is financed by 60% debt and 40% equity. Dahmen would like to determine their...

Dahmen plc is financed by 60% debt and 40% equity. Dahmen would like to determine their weighted-average cost of capital (WACC) so this can be used to appraise their potential capital investment projects. Describe the WACC. (4 marks, maximum 200 words) You have been provided with the following information to allow you to determine Dahmen’s WACC Dahmen’s bond holders have a required yield of 9% Dahmen’s ordinary shares are currently priced at $40. The latest dividend of $4 per share...

You are thinking about starting a new business that makes and sells a product similar to...

You are thinking about starting a new business that makes and sells a product similar to Red Bull. Why is this magical drink that “gives you wings” under government scrutiny in several countries? What are the ethical issues surrounding making and selling products that may or may not be harmful to a person's health?

Your sister is thinking about starting a new business. The company would require $300,000 of assets,...

Your sister is thinking about starting a new business. The company would require $300,000 of assets, and it would be financed entirely with common stock. She will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business? a. $33,210 b. $40,500 c. $41,310 d. $44,145

You are 40 years old and want to retire at age 60. Each year, starting one...

You are 40 years old and want to retire at age 60. Each year, starting one year from now, you will deposit an equal amount into an investment account that pays 4.6% interest. The last deposit will be on your 60th birthday. On your 60th birthday, you will switch the accumulated savings into a safer bank account that pays only 4.2% interest. You will withdraw your annual income of $130,000 at the end of that year (on your 61st birthday)...

The firm is financed by 40% of debt and 60% of equity. It has the weigthed...

The firm is financed by 40% of debt and 60% of equity. It has the weigthed average cost of capital of 15%. The cost of equity is 25%. What is the cost of debt? Assume that there are no taxes.And think about another situation. The firm is financed by 40% of debt and 60% of equity. It has the weigthed average cost of capital of 15%. The cost of debt is 8%. What is the cost of equity? Assume that...

3. You are thinking about starting a bee keeping business to produce honey. You also plan...

3. You are thinking about starting a bee keeping business to produce honey. You also plan to sell pollination services to almond growers in California. Below is the cost function you have estimated for producing honey and pollination services with 450 hives: C(QH, QP) = 5,000 + 12QH + 100QP + 0.002 QH QP where QH is the number of pounds of honey produced and QP is the number of acres of almond trees pollinated. (5) a. You have contracted...

5. Discuss the role of debt finance and equity finance from the business side, and the...

5. Discuss the role of debt finance and equity finance from the business side, and the financial investor’s (saver’s) side. Considering our discussions over the past several weeks with respect to credit, saving, investment, and crowding out, discuss the implications of each for the long term stability for the economy and for the business. *Refer Macroeconomics by Gregory Mankiw. 10th edition; please explain the complete answer in a detailed way

Give the data: Cost of equity: 5% Cost of debt: 7% %debt: 60% %Equity: 40% what...

Give the data: Cost of equity: 5% Cost of debt: 7% %debt: 60% %Equity: 40% what is the weighted average cost of capital of this company? A: 3.7% B: 5.9% C: 6.2% D: 4.0%

Geronimo Corp is financed 60% with equity and 40% with debt.Currently, its debt has a...

Geronimo Corp is financed 60% with equity and 40% with debt. Currently, its debt has a before-tax yield to maturity of 5%. Geronimo's common stock has a beta of 1.75 and market risk premium is 8% while risk free rate is 1%. If the tax rate is 40%, what is Geronimo's weighted average cost of capital (WACC)?A. 7.40%B. 7.83%C. 10.20%D. 9.00%E. 11.47%

Question