1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
nirvana33 [79]
3 years ago
9

Great Subs Inc., a regional sandwich chain, is considering purchasing a smaller chain, Eastern Pizza, which is currently finance

d using 20% debt at a cost of 8%. Great Subs’ analysts project that the merger will result in incremental free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. (The Year 4 cash flow includes a horizon value of $107 million.) The acquisition would be made immediately, if it is to be undertaken. Eastern's pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8%, and the market risk premium is 4%.
Required:
What is the appropriate rate for use in discounting the free cash flows and the interest tax savings?
Business
1 answer:
tatuchka [14]3 years ago
3 0

Answer:

WACC 13.85600%

Explanation:

First we calculate Eastern Pizza CAPM:

Ke= r_f + \beta (r_m-r_f)

risk free = 0.08

market rate = 0.12

premium market = (market rate - risk free) 0.04

beta(non diversifiable risk) = 2

Ke= 0.08 + 2 (0.04)

Ke 0.16000

Then we solve for WACC

WACC = K_e(\frac{E}{E+D}) + K_d(1-t)(\frac{D}{E+D})

Ke 0.16000

Equity weight 0.8

Kd 0.08

Debt Weight 0.2

t 0.34

WACC = 0.16(0.8) + 0.08(1-0.34)(0.2)

WACC 13.85600%

The company will use the data on eastern Pizza to evualuate project presented to it. Also, it will  consider the new tax rate to determinate the tax shield.

You might be interested in
Wear Ever is expanding and needs $6.8 million to help fund this growth. The company estimates it can sell new shares of stock fo
kakasveta [241]

Answer: 179,811 shares

Explanation:

Given that,

Price of each share = $43

Amount needed for expansion = $6.8 million

Cost incurred for  filing and legal fees = $352000

Underwriters have agreed to a spread of 7.5 percent

Now,

Net price after the underwriter spread = $43 × ( 1 - 7.5%)

= $39.775

Total capital needed = Fund needed for growth + Legal and filing fees

= $6,800,000 + $352,000

= $7,152,000

Number of shares sold = \frac{7152000}{39.775}

= 179,811 shares

5 0
3 years ago
Bonnie's employer provides her with an annual dinner club membership costing $5,000. Her marginal tax rate is 24 percent. Her em
Nikolay [14]

Answer:

$3,800

Explanation:

The computation of the after-tax benefit is shown below:

= Annual dinner club membership cost - annual dinner club membership cost × her marginal tax rate

= $5,000 - $5,000 × 24%

= $5,000 - $1,200

= $3,800

We simply deduct her tax expense from the annual dinner club membership cost so that the accurate amount can come.

All other information which is given is not relevant. Hence, ignored it

8 0
3 years ago
During 2020, Sarasota Furniture Company purchases a carload of wicker chairs. The manufacturer sells the chairs to Sarasota for
vfiekz [6]

Answer

The answer and procedures of the exercise are attached in the following archives.

Step-by-step explanation:

Gross profit = Sales - Cost of goods sold

= (440 x 90 + 220 x 80 + 264 x 50) - (440 x 56.7 + 220 x 50.4 + 264 x 31.5)

= (39,600 + 17,600 + 13,200) - (24,948 + 11,088 + 8,316)

= 70,400 - 44,352

= $26,048

Ending inventory schedule attached in the excel archive

You will find the procedures, formulas or necessary explanations in the archive attached below. If you have any question ask and I will aclare your doubts kindly.  

Download xlsx
8 0
3 years ago
Which of these is not something to consider when trying to get a positive return on investment (roi) for higher education?
Fantom [35]

Something not to consider when trying to get a positive return on investment (ROI) for higher education is: c. the type of food that is offered on the meal plan.

<h3>What is rate of return?</h3>

Rate of return can be defined as a net gain (profit) or loss that is associated with an investment over a specified period of time, and it's usually expressed as a percentage of the investment's initial cost.

This ultimately implies that, the rate of return must be higher than the rate of inflation in order for any business firm or individual to earn money on their investments.

Also, a positive return on investment (ROI) entails a net gain (profit) from an investment over a specified period of time. This ultimately implies that, the type of food that is offered on the meal plan isn't something to consider when trying to get a positive return on investment (ROI) for higher education.

Read more on return on investment here: brainly.com/question/23603222

#SPJ1

Complete Question:

Which of these is not something to consider when trying to get a positive return on investment (ROI) for higher education?

a. The cost of attendance.

b. The financial aid package that is offered to you.

c. The type of food that is offered on the meal plan.

d. Your expected career income.

5 0
11 months ago
A tariff:_________.
Sergio [31]

Answer:

<h2>C. Makes domestic consumer worse off. </h2>

Explanation:

A tariff is levied on the exports and imports between two countries. It is meant to regulate the foreign trade and encourage the domestic industries and safeguard them from the competition of foreign goods. Tariffs are source of income for states. Tariffs and import export quotas are most used instruments of protectionism. Tariffs are fixed or variable.

It can put the domestic consumer in an advantageous position as due to tariffs they would not be able to get less costly products.

8 0
3 years ago
Other questions:
  • Suddeth Corporation has entered into a 6 year lease for a building it will use as a warehouse. The annual payment under the leas
    5·1 answer
  • Closet Links Clothing Company provided the following manufacturing costs for the month of June. Direct labor cost $ 130,000 Dire
    15·1 answer
  • Mama's Pizza Shoppe borrowed $7,200 at 12% interest on May 1, 2021, with principal and interest due on October 31, 2022. The com
    12·1 answer
  • -
    6·1 answer
  • You have just started a new business. You need to have three to four workstations available for your employees who simply need t
    7·1 answer
  • You are a new manager at a plumbing supply manufacturer where there are an unusually high number of returns for a new aerator us
    11·1 answer
  • Bucknum Boys, Inc., produces hunting gear for buck hunting. The company’s main production departments are Molding and Finishing.
    13·1 answer
  • On January 1, 2021, Majestic Mantles leased a lathe from Equipment Leasing under a finance lease. Lease payments are made annual
    7·1 answer
  • If you were a manager, which management style do you think you would use most often?
    14·1 answer
  • Bald Eagle, Inc., had the following transactions for the year ended December 31, Year 7. Select from the options list provided t
    12·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!