problem 1)..................The corporation is evaluating a project that will co
ID: 2695110 • Letter: P
Question
problem 1)..................The corporation is evaluating a project that will cost $150,000; it is expected to last for 8 years and produce before-tax cash flows, including depreciation, of $52,302 per year. If the firm's cost of capital is 14% and its tax rate is 40%, what is the project's IRR? ???????????????????????????????????? Problem 2.................... The firm is planning an expansion project that it desires to finance with newly issued common stock. The firm has an outstanding issue of common stock that just paid a dividend of $4.25 per share with 6% constant growth rate, which is trading for $65 per share. You have advised the firm that flotation costs will be 8% per share. What will be the cost of the newly issued common shares? ?????????????????????????? Problem 3........................ The firm filed Chapter 11 and the bankruptcy judge granted a new indenture on an outstanding bond issue to be put into effect. The bond has 20 years to maturity and coupon rate of 8 percent paid annually. The new agreement allows the firm to pay no interest for the first 10 years, and then start paying interest payments for the next 10 years and at maturity in 20 years, to repay the principal plus the interest that was not paid for the first five years, but without payingExplanation / Answer
The question goes like this, intial CF = $150,000 ,,t = 8 years
after tax flow = .6*52,302 = $ 31,381.2
150,000 = 31,381.2/(1+r) + 31,381.2/(1+r)^2 + 31,381.2/(1+r)^3 .........31,381.2/(1+r)^8
IRR
= 13.11%
required rate of return = 14%
IRR< Required return ,,, therrefore project will be rejected
2)) part 2..
Present Value = 4.25/0.06
= 70.833;
Cost
= 70.833*1.08
= 76.5
3))
lets assuming 1000 face value ;
payments = 8/100 * 1000 = $ 80 for 20 years ;
current price = 80*10 + 80/1.15^11 + 80/1.15^12 + 80/1.15^13 + .....80/1.15^20
= $931.8
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