An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $109 million in free cash flow every year for five years, at which time it will be abandoned. A buyout firm proposes to purchase the company for $440 million financed with $390 million in compound interest debt to be repaid in five, equal, end-of-year payments and carrying an interest rate of 6.5 percent. a. Calculate the annual debt-service payments required on the debt. b. Ignoring taxes, estimate the rate of return to the buyout firm on the acquisition after debt service. Note: Round your answers to 1 decimal place. a. Annual debt service payment b. Rate of return million %

An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $109 million in free cash flow every year for five years, at which time it will be abandoned. A buyout firm proposes to purchase the company for $440 million financed with $390 million in compound interest debt to be repaid in five, equal, end-of-year payments and carrying an interest rate of 6.5 percent. a. Calculate the annual debt-service payments required on the debt. b. Ignoring taxes, estimate the rate of return to the buyout firm on the acquisition after debt service. Note: Round your answers to 1 decimal place. a. Annual debt service payment b. Rate of return million %

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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An all-equity financed company has a cost of capital of 10 percent. It owns one asset: a mine capable of generating $109 million in free cash flow every year for five years, at which time it will be abandoned. A buyout firm proposes to purchase the company for $440 million financed with $390 million in compound interest debt to be repaid in five, equal, end-of-year payments and carrying an interest rate of 6.5 percent. a. Calculate the annual debt-service payments required on the debt. b. Ignoring taxes, estimate the rate of return to the buyout firm on the acquisition after debt service. Note: Round your answers to 1 decimal place. a. Annual debt service payment b. Rate of return $ 93.9 million %
Gemini, Inc., an all-equity firm, is considering a $1.7 million investment that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $595,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 9.5 percent loan to finance the project from a local bank. They will receive the total amount needed for investment ($1.7 million at time 0 and all principal will be repaid in one balloon payment at the end of the fourth year (similar to a bond). Every year the company would need to pay interest (@9.5%). If the company finances the project entirely with equity, the firm’s cost of capital would be 13 percent. The corporate tax rate is 30 percent. Calculate the cash flows and NPV for the two cases:
A 5-year project will require an investment of $100 million. This comprises of plant andmachinery worth $80 million and a net working capital of $20 million. The entire outlay willbe incurred at the project’s commencement.Financing for the project has been arranged as follows:80,000 new common shares are issued, the market price of which is $500 per share. Theseshares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9%per year for an indefinite tenure.Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having aface value of $1,000. These bonds now have a market value of $1,150 each.At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the networking capital will be liquidated at its book value.The project is expected to increase revenues of the firm by $120 million per year. Expenses,other than depreciation, interest and tax, will amount to $80 million per year. The firm is subjectto…
A 5-year project will require an investment of $100 million. This comprises of plant andmachinery worth $80 million and a net working capital of $20 million. The entire outlay willbe incurred at the project’s commencement.Financing for the project has been arranged as follows:80,000 new common shares are issued, the market price of which is $500 per share. Theseshares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9% per year for an indefinite tenure.Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having a face value of $1,000. These bonds now have a market value of $1,150 each.At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the net working capital will be liquidated at its book value.The project is expected to increase revenues of the firm by $120 million per year. Expenses,other than depreciation, interest and tax, will amount to $80 million per year. The firm is…
A 5-year project will require an investment of $100 million. This comprises of plant andmachinery worth $80 million and a net working capital of $20 million. The entire outlay willbe incurred at the project’s commencement.Financing for the project has been arranged as follows:80,000 new common shares are issued, the market price of which is $500 per share. Theseshares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9%per year for an indefinite tenure.Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having aface value of $1,000. These bonds now have a market value of $1,150 each.At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the networking capital will be liquidated at its book value.The project is expected to increase revenues of the firm by $120 million per year. Expenses,other than depreciation, interest and tax, will amount to $80 million per year. The firm is subjectto…
A 5-year project will require an investment of $100 million. This comprises of plant andmachinery worth $80 million and a net working capital of $20 million. The entire outlay willbe incurred at the project’s commencement.Financing for the project has been arranged as follows:80,000 new common shares are issued, the market price of which is $500 per share. Theseshares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9%per year for an indefinite tenure.Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having aface value of $1,000. These bonds now have a market value of $1,150 each.At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the networking capital will be liquidated at its book value.The project is expected to increase revenues of the firm by $120 million per year. Expenses,other than depreciation, interest and tax, will amount to $80 million per year. The firm is subjectto…
Knotts, Incorporated, an all-equity firm, is considering an investment of $1.89 million that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $616,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 9.6 percent loan to finance the project from a local bank. All principal will be repaid in one balloon payment at the end of the fourth year. The bank will charge the firm $66,000 in flotation fees, which will be amortized over the four-year life of the loan. If the company financed the project entirely with equity, the firm's cost of capital would be 11 percent. The corporate tax rate is 25 percent. Using the adjusted present value method, calculate the APV of the project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,…
A 5-year project will require an investment of $100 million. This comprises of plant andmachinery worth $80 million and a net working capital of $20 million. The entire outlay willbe incurred at the project’s commencement.Financing for the project has been arranged as follows:80,000 new common shares are issued, the market price of which is $500 per share. Theseshares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9%per year for an indefinite tenure.Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having aface value of $1,000. These bonds now have a market value of $1,150 each.At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the networking capital will be liquidated at its book value.The project is expected to increase revenues of the firm by $120 million per year. Expenses,other than depreciation, interest and tax, will amount to $80 million per year. The firm is subjectto…
A 5-year project will require an investment of $100 million. This comprises of plant andmachinery worth $80 million and a net working capital of $20 million. The entire outlay willbe incurred at the project’s commencement.Financing for the project has been arranged as follows:80,000 new common shares are issued, the market price of which is $500 per share. Theseshares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9% per year for an indefinite tenure.Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having a face value of $1,000. These bonds now have a market value of $1,150 each.At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the net working capital will be liquidated at its book value.The project is expected to increase revenues of the firm by $120 million per year. Expenses,other than depreciation, interest and tax, will amount to $80 million per year. The firm is…
A 5-year project will require an investment of $100 million. This comprises of plant andmachinery worth $80 million and a net working capital of $20 million. The entire outlay willbe incurred at the project’s commencement.Financing for the project has been arranged as follows:80,000 new common shares are issued, the market price of which is $500 per share. Theseshares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9%per year for an indefinite tenure.Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having aface value of $1,000. These bonds now have a market value of $1,150 each.At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the networking capital will be liquidated at its book value.The project is expected to increase revenues of the firm by $120 million per year. Expenses,other than depreciation, interest and tax, will amount to $80 million per year. The firm is subjectto…
A 5-year project will require an investment of $100 million. This comprises of plant andmachinery worth $80 million and a net working capital of $20 million. The entire outlay willbe incurred at the project’s commencement.Financing for the project has been arranged as follows:80,000 new common shares are issued, the market price of which is $500 per share. Theseshares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9%per year for an indefinite tenure.The remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having aface value of $1,000. These bonds now have a market value of $1,150 each.At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the networking capital will be liquidated at its book value.The project is expected to increase the revenues of the firm by $120 million per year. Expenses,other than depreciation, interest and tax, will amount to $80 million per year. The firm is…
A 5-year project will require an investment of $100 million. This comprises of plant andmachinery worth $80 million and a net working capital of $20 million. The entire outlay willbe incurred at the project’s commencement. Financing for the project has been arranged as follows: 80,000 new common shares are issued, the market price of which is $500 per share. Theseshares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9%per year for an indefinite tenure.Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having aface value of $1,000. These bonds now have a market value of $1,150 each.At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the networking capital will be liquidated at its book value.The project is expected to increase revenues of the firm by $120 million per year. Expenses,other than depreciation, interest and tax, will amount to $80 million per year. The firm is…

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