The Also Horns Corp. is planning on introducing a new line of saxophones. They e
ID: 2656990 • Letter: T
Question
The Also Horns Corp. is planning on introducing a new line of saxophones. They expect sales to be $400,000 with total fixed and variable costs representing 70% of sales. The discounted rate of the unlevered equity is 17%, but the firm plans to raise $144,385 of the initial $450,000 investment as 9% perpetual debt. The corporate tax rate is 40% and the target debt to asset (or value) ratio is 0.3.
Suppose the FTE approach is used to evaluate the project for the next 3 questions.
How much is the levered cash flow?
$42,250
$48,000
$55,236
$64,203
$70,520 1 points QUESTION 81 1. What is the rS, discount rate for the equity of the levered firm?
16.25%
18.14%
19.06%
19.67%
20.20% 1 points QUESTION 82 1. What is the Initial Net Equity Investment?
$200,000
$225,500
$250,500
$275,500
$305,615
The Also Horns Corp. is planning on introducing a new line of saxophones. They expect sales to be $400,000 with total fixed and variable costs representing 70% of sales. The discounted rate of the unlevered equity is 17%, but the firm plans to raise $144,385 of the initial $450,000 investment as 9% perpetual debt. The corporate tax rate is 40% and the target debt to asset (or value) ratio is 0.3.
Suppose the FTE approach is used to evaluate the project for the next 3 questions.
How much is the levered cash flow?
$42,250
$48,000
$55,236
$64,203
$70,520 1 points QUESTION 81 1. What is the rS, discount rate for the equity of the levered firm?
16.25%
18.14%
19.06%
19.67%
20.20% 1 points QUESTION 82 1. What is the Initial Net Equity Investment?
$200,000
$225,500
$250,500
$275,500
$305,615
The Also Horns Corp. is planning on introducing a new line of saxophones. They expect sales to be $400,000 with total fixed and variable costs representing 70% of sales. The discounted rate of the unlevered equity is 17%, but the firm plans to raise $144,385 of the initial $450,000 investment as 9% perpetual debt. The corporate tax rate is 40% and the target debt to asset (or value) ratio is 0.3.
Suppose the FTE approach is used to evaluate the project for the next 3 questions.
How much is the levered cash flow?
$42,250
$48,000
$55,236
$64,203
$70,520 1 points QUESTION 81 1. What is the rS, discount rate for the equity of the levered firm?
16.25%
18.14%
19.06%
19.67%
20.20% 1 points QUESTION 82 1. What is the Initial Net Equity Investment?
$200,000
$225,500
$250,500
$275,500
$305,615
Explanation / Answer
a)Levered Cash flow = (Revenue - Costs - Interest)*(1- tax rate)= (400000 -70%* 400000 - 9%* 144385)*(1-40%) = 64203.21
Option d is correct
b)Target D/E ratio = Debt/total value/(1 -Debt/Total value) = 0.3/(1-0.3) =3/7
Cost of equity Levered = Cost of Equity unlevered + D/E * ( Cost of Equity Unleverd - Cost Of Debt) *(1- tax rate)
Cost of equity Levered = 17% + 3/7 * ( 17% - 9%)*(1-40%)= 0.19057or 19.06%
Option c is correct
c) Initilal equity investment = Total investment - Debt = 450,000 - 144,385 = 305,615
Option e is correct
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