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vodomira [7]
4 years ago
11

Travis & Sons has a capital structure that is based on 45 percent debt, 5 percent preferred stock, and 50 percent common sto

ck. The pretax cost of debt is 8.3 percent, the cost of preferred is 9.2 percent, and the cost of common stock is 15.4 percent. The tax rate is 21 percent. A project is being considered that is equally as risky as the overall company. This project has initial costs of $287,000 and annual cash inflows of $91,000, $248,000, and $145,000 over the next three years, respectively. What is the projected net present value of this project?
Business
2 answers:
netineya [11]4 years ago
7 0

Answer:

The projected net present value of this project is $101,488

Explanation:

In order to calculate the projected net present value of this project, first we would need to calculate the WACC as follows:

WACC=Respective cost*Respective weight

Aftertax cost of debt=8.3(1-tax rate)

=8.3(1-0.21)=6.557%

Hence, WACC=(6.557*0.45)+(0.05*9.2)+(0.5*15.4)

=11.11065%

Therefore, to calculate the projected net present value of this project we would have to use the following formula:

NPV=Present value of inflows-Present value of outflows

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=91000/1.1111065+248000/1.1111065^2+145000/1.1111065^3

=$388,488.32

Therefore, NPV= $388,488.32-$287000

=$101,488

The projected net present value of this project is $101,488

nadya68 [22]4 years ago
4 0

Answer:

$101,493

Explanation:

Net present value is the Net value all cash inflows and outflows in present value term. All the cash flows are discounted using a required rate of return.

First we have to calculate the WACC to determine the cost of capital for Net present value calculation.

WACC is the average cost of capital of the firm based on the weightage of the debt and weightage of the equity multiplied to their respective costs.

Formula for WACC

Weighted Average Cost of Capital = (Cost of common stock x Weightage of common stock ) + (Cost of preferred Stock x Weightage of preferred Stock ) + (Cost of Debt (1 -t) x Weightage of Debt)

Placing Values in the formula

Weighted Average Cost of Capital = ( 15.4% x 50% ) + ( 9.2% x 5% ) + ( 8.3% x ( 1 - 0.21 ) x 45% ) = 7.7% + 0.46% + 2.95% = 11.11%

Now we will calculate the NPV

Net Present Value = Initial Investment + PV of all future cash flows

NPV = ($287,000) + [ $91,000 x ( 1 + 11.11% )^-1 ] + [ $248,000 x ( 1 + 11.11% )^-2 ] + [ $145,000 x ( 1 + 11.11% )^-3 ]

NPV = ($287,000) + $81,901 + $200,884 + 105,708 = $101,493

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Anni [7]

Answer:

a. Debt holders have first claim on corporate value. The Preferred stockholders then have next claim and remaining is left for common stockholders.

b. The value of a financial asset is equal to present value of future cash flows which is provided by the asset. When investor buys a share of stock, (s)he typically expects to receive cash in the form of dividends and to sell the stock to receive cash from sale. However, the price any investor receives is highly dependent upon the dividends which the next investor expects to receive, and so on. Thus, the stock's value depends on cash dividends that the company is expected to provide and the discount rate used to find the present value of those dividends.

d. The formula to calculate present value of expected free cash flows is:

PVn=CFn(1+in)n

The formula for the present value of expected free cash flows when discounted at WACC is:

PV=∑Nn=0CFn(1+in)n

Explanation:

a. Debt holders have first claim on corporate value. The Preferred stockholders then have next claim and remaining is left for common stockholders.

b. The value of a financial asset is equal to present value of future cash flows which is provided by the asset. When investor buys a share of stock, (s)he typically expects to receive cash in the form of dividends and to sell the stock to receive cash from sale. However, the price any investor receives is highly dependent upon the dividends which the next investor expects to receive, and so on. Thus, the stock's value depends on cash dividends that the company is expected to provide and the discount rate used to find the present value of those dividends.

d. The formula to calculate present value of expected free cash flows is:

PVn=CFn(1+in)n

The formula for the present value of expected free cash flows when discounted at WACC is:

PV=∑Nn=0CFn(1+in)n

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according to the basic dcf stock valuation model, the value an investor should assign to a share of stock is dependent on the le
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3 years ago
Actual sales volume for a period is 5,000 units. Budgeted sales volume is 4,500. Actual selling price per unit is $15 and budget
dlinn [17]

If the actual sales volume is 5000 units,budgeted sales volume is 4500, actual selling price be $15 per unit and the budgeted price per unit be $15.75 per unit then the sales price variance is -$3750.

Given that actual sales volume is 5000 units,budgeted sales volume is 4500 units, actual selling price be $15 per unit and budgeted price per unit be $15.75 per unit.

We are required to find the sales price variance of the data.

Actual Sales volume = 5,000 units

Budgeted sales volume = 4,500

Actual selling price per unit = $15

Planned selling price = $15.75

So, calculation of the sales price variance is given below:-

Sales variance =Actual quantity sold × (actual selling price - planned selling price)

=5000*(15-15.75)

=5000*(-0.75)

=-$3750

Hence if the actual sales volume is 5000 units,budgeted sales volume is 4500, actual selling price be $15 per unit and the budgeted price per unit be $15.75 then the sales price variance is -$3750.

Learn more about variance at brainly.com/question/15858152

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6 0
2 years ago
If projects are mutually exclusive, only one project can be chosen. The internal rate of return (IRR) and the net present value
dangina [55]

If projects are mutually exclusive, only one project can be chosen. The internal rate of return (IRR) and the net present value (NPV) methods will not always choose the same project. If the crossover rate on the NPV profile is below the horizontal axis, the methods will _<em>always_</em> agree.

NPV is the abbreviation of Net present value which is a financial metric that seeks to capture the total value of an investment opportunity.

For mutually exclusive projects, if the IRR or internal rate of return is greater than the cost of capital, you accept the project. If it is less than the cost of capital, then you reject the project.

Also, If projects are mutually exclusive, accept the one with the highest IRR or internal rate of return by assuming it is above the hurdle rate.

Therefore, the answer is always.

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4 0
1 year ago
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