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Ahat [919]
2 years ago
10

Based on market values, Gubler's Gym has an equity multiplier of 1.46 times. Shareholders require a return of 10.91 percent on t

he company's stock and a pretax return of 4.84 percent on the company's debt. The company is evaluating a new project that has the same risk as the company itself. The project will generate annual aftertax cash flows of $277,000 per year for 7 years. The tax rate is 39 percent. What is the most the company would be willing to spend today on the project
Business
1 answer:
rewona [7]2 years ago
6 0

Answer:

The answer is "5.4% and 15,23,500".

Explanation:

Calculating the capital cost:

=(1-\frac{1}{1.46})\times 10.91\% \times (1-39\%)+(\frac{1}{1.46})\times 4.84\% \\\\=(\frac{1.46-1}{1.46})\times \frac{10.91}{100} \times (\frac{100-39}{100})+(\frac{1}{1.46})\times \frac{4.84}{100} \\\\ =(\frac{0.46}{1.46})\times \frac{10.91}{100} \times (\frac{61}{100})+(\frac{1}{1.46})\times \frac{4.84}{100} \\\\=\frac{306.1346}{14600}+\frac{4.84}{146} \\\\=  0.021+0.033 \\\\ =0.054\\\\= 5.4\%

Maximum amount to be spent

=\frac{277,000\times 100 }{5.4} \times (1-\frac{1}{(1.054)^7})\\\\=\frac{277,000\times 100 }{5.4} \times (1-\frac{1}{1.44})\\\\=\frac{277,000\times 100 }{5.4} \times (1-0.7)\\\\=277,000 \times 100\times 0.055\\\\=\$15,23,500\\

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Answer:

The value of the firm is $1,773,333

Explanation:

<u>Calculation of Value of each share</u>

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No. of shares repurchased (B)      <u>   21,000   </u>

Value for each share (C)               <u>  $11.67   </u>

<u></u>

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(152,000 - 21,000)

Value for each share(B)                                        <u>   $11.67   </u>

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Add: Amount borrowed                                      <u>  $245,000</u>

Firm value after this transaction                     <u>  $1,773,333</u>

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3 years ago
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andreyandreev [35.5K]

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Answer:

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