Tortuga, Inc. is looking to raise $4 million for new equipment to enhance the efficiency of itsoperations. The firm currently is capitalized with 250,000 shares of equity at a market priceof $35 per share and also has $2,000,000 of debt with an interest rate of 9%. The companybelieves that with the new capital they could achieve an EBIT of $1,500,000. Assume newequity could be issued at current market price and that new debt would still carry a 9%coupon. The company has a 25% marginal tax rate. Should Tortuga issue Equity or Debt?Debt, because EPS will be $2.88Debt, because EPS will be $1.95O Equity, because EPS will be $2.72Equity, because EPS will be $2.13

Tortuga should issue equity or debt whichever has the highest EPS after expansion.

Answered: Tortuga, Inc. is looking to raise $4…

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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GBATT has a capital need of $100 million to fund its operations. GBATT has an equity investor that has made an investment in the common stock of GBATT for 60% of this amount but there is the anticipation is that they will earn a 15% return on this investment through capital returns and dividends. This level of anticipated return takes into account the anticipated risk in the investment. With this amount of capital support, GBATT was able to find a lender who will provide the balance of the capital needed at an interest rate of 10% with such debt to be paid out over 10 years. Such lender will require GBATT to fully collateralize its buildings in support of its bond payments. What is the cost of capital in this example?
Dyrdek Enterprises has equity with a market value of $1.8 million and the market value of debt is $3.55 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.6 percent. The new project will cost $2.20 million today and provide annual cash flows of $576,000 for the next 6 years. The company's cost of equity is 11.07 percent and the pretax cost of debt is 4.88 percent. The tax rate is 21 percent. What is the project's NPV?
You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $ 11 million. The product will generate free cash flow of $ 0.73 million the first year, and this free cash flow is expected to grow at a rate of 6% per year. Markum has an equity cost of capital of 11.7 %, a debt cost of capital of 5.79 %, and a tax rate of 26 %. Markum maintains a debt - equity ratio of 0.90. a. What is the NPV of the new product line (including any tax shields from leverage)? b. How much debt will Markum initially take on as a result of launching this product line? c. How much of the product line's value is attributable to the present value of interest tax shields?
Dyrdek Enterprises has equity with a market value of $12.2 million and the market value of debt is $4.25 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.6 percent. The new project will cost $2.48 million today and provide annual cash flows of $646,000 for the next 6 years. The company's cost of equity is 11.63 percent and the pretax cost of debt is 5.02 percent. The tax rate is 25 percent. What is the project's NPV? a. $212,299 b. $506,561 c. $204,036 d. $366,955 e. $237,409
You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $11 million. The product will generate free cash flow of $0.76 million the first year, and this free cash flow is expected to grow at a rate of 6% per year. Markum has an equity cost of capital of 10.5%, a debt cost of capital of 5.04%, and a tax rate of 23%. Markum maintains a debt-equity ratio of 0.70. a. What is the NPV of the new product line (including any tax shields from leverage)? b. How much debt will Markum initially take on as a result of launching this product line? c. How much of the product line's value is attributable to the present value of interest tax shields? a. What is the NPV of the new product line (including any tax shields from leverage)? The NPV of the new product line is $ million. (Round to two decimal places.) C...
Your firm is planning to invest in a new electrostatic power generation system. Ampthill Inc is a firm that specializes in this business. Ampthill has a stock price of $25 per share with 20 million shares outstanding. Ampthill's equity beta is 1.4. It also has $220 million in debt outstanding with a debt beta of 0.1. Your estimate of the asset beta for electrostatic power generators is closest to 1.18 1 0.79 1.3
Dyrdek Enterprises has equity with a market value of $12.6 million and the market value of debt is $4.45 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.9 percent. The new project will cost $2.56 million today and provide annual cash flows of $666,000 for the next 6 years. The company's cost of equity is 11.79 percent and the pretax cost of debt is 5.06 percent. The tax rate is 24 percent. What is the project's NPV? Multiple Choice $208,195 $194,561 $536,049 $183,363 $364,858
You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $8 million. The product will generate free cash flow of $0.71 million the first year, and this free cash flow is expected to grow at a rate of 3% per year. Markum has an equity cost of capital of 11.4%, a debt cost of capital of 7.54%, and a tax rate of 38%. Markum maintains a debt-equity ratio of 0.50. a. What is the NPV of the new product line (including any tax shields from leverage)? b. How much debt will Markum initially take on as a result of launching this product line? c. How much of the product line's value is attributable to the present value of interest tax shields? a. What is the NPV of the new product line (including any tax shields from leverage)? The NPV of the new product line is $ 3.53 million. (Round to two decimal places.) b. How much debt will Markum initially take on as a result of launching this product line?…
You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $7 million. The product will generate free cash flow of $0.76 million the first year, and this free cash flow is expected to grow at a rate of 6% per year. Markum has an equity cost of capital of 10.9%, a debt cost of capital of 5.35%, and a tax rate of 42%. Markum maintains a debt-equity ratio of 0.40. What is the NPV of the new product line (including any tax shields from leverage)? (Round to two decimalplaces.) How much debt will Markum initially take on as a result of launching this product line? (Round to two decimalplaces.) How much of the product line's value is attributable to the present value of interest tax shields? (Round to two decimalplaces.)
Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-to-equity ratio of 0.56. It is considering building a new $62 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $7.9 million a year in perpetuity. The company raises all equity from outside financing. The required financing will be met by the following: 1. A new issue of common stock. The flotation costs of the new common stock would be 9 percent of the amount raised. The required return on the company's new equity is 13 percent. 2. A new issue of 25-year bonds. The flotation costs of the new bonds would be 5 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 9 percent, they will sell at par. 3. Increased use of accounts payable financing. Because this financing is part of the company's ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same…
Morgan Industries is an all-equity firm with 50 million shares outstanding. Iota has $200 million in cash and expects future free cash flows of $75 million per year. Management plans to use the cash to expand the firm's operations, which in turn will increase future free cash flows by 12%. Morgan's cost of capital is 10% and assume that capital markets are perfect. • What is the value of Morgan Industries if they use the $200 million to expand?• What is the price per share of Morgan Industries if they use the $200 million to expand?
Companies invest in expansion projects with the expectation of increasing the earnings of their businesses. Consider the case of IQMetrics Corporation. IQMetrics is proceeding with a new expansion project that is anticipated to have a four-year life span. The project calls for the purchase of a building for $5 million and equipment valued at $3 million. IQMetrics’s corporate tax rate is 30%, and its discount rate is 10%. Upon completion of the project, the company expects the salvage values to be $4 million and $2 million, respectively. The capital cost allowance (CCA) rate for the asset classes as given by the Canada Revenue Agency (CRA) are buildings, 4%; equipment, 20%; and manufacturing assets, 30%. Calculate the present value for the total tax shield. The present value is

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