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Roman55 [17]
3 years ago
9

Alpha Industries is considering a project with an initial cost of $8 million. The project will produce cash inflows of $1.49 mil

lion per year for 8 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.61 percent and a cost of equity of 11.27 percent. The debt–equity ratio is .60 and the tax rate is 35 percent. What is the net present value of the project?
Business
1 answer:
IrinaVladis [17]3 years ago
3 0

Answer:

NPV = 1,003,046

Explanation:

NPV = Present value of income - investment

investment 8,000,000

1,490,000 income per year during 8 years at rate x

We need to calculate the WACC so we can know the rate

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

equity-ratio = 0.40

\frac{E}{E+D} =0.40

debt-equity ratio = 0.6

\frac{D}{E+D} =0.60

K_e= 11.27\\0.1127 \times0.40 = 0.04508

K_d = 5.61 \\0.0561\times (1-.35)\times 0.6 = 0.021879

WACC 6.69590%

Now that we achieve the rate we solve for the present value of the cash flow

C * \frac{1-(1+r)^{-time} }{rate} = PV\\

1.49* \frac{1-(1.06959)^{-8} }{0.06959} = PV\\

PV 9,003,046

And finally get the answer

NPV 9,003,046 - 8,000,000 = 1,003,046

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Roll over each item on the left to read the description. Identify whether each of the statements is an argument for or an argume
Naya [18.7K]

Answer:

<u>Floating exchange rate</u>

Here the market decides the value of the currency as it trade freely in the market based on supply and demand.

Argument For;

Market Based - It is market based therefore it reflects the true value of the currency.

Argument Against;

Uncertainty -  As it trades according to the whims of supply and demand, telling which direction it will go in terms of value is a difficult undertaking therefore financial decisions based on such are riskier.

<u>Fixed exchange rate</u>

Here the value of the currency is fixed either to the value of another currency or to the price of gold.

Argument For;

No Uncertainty -  As the currency is tied to another currency which is usually more stable or gold, the rate of the currency is more predictable.

Argument Against;

Unknown Elements

<u>Managed float</u>

In this exchange rate regime, the Central bank of a country intervenes in the Foreign exchange market to push or pull the currency in the direction that it prefers.

Argument For;

Government intervention - The Government Intervention ensures that the currency's value remains stable as well as allowing the Central bank to maintain a good balance of payments.

Argument Against;

Difficult - Maintaining the currency within the band preferred in a difficult undertaking that requires constant intervention in the Forex market.

<u>Pegged exchange rate</u>

The Central bank in this instance pegs the currency to a basket of currencies after setting an exchange rate it would prefer and then intervenes in forex market to keep it that way.

Argument For;

Reduces uncertainty - The movement of the currency is more predictable due to it being pegged to a basket of currencies.

Argument Against;

Continual government intervention - As this requires the currency to remain at a certain value, the government will keep intervening to ensure that it stays at that exact level.

<u>Target zone</u>

Here the Central Bank allows the currency to fluctuate on the market albeit with limits placed on how much it can do so.

Argument For;

Fluctuation with limits - By combining fixed regimes with floating regimes, the currency can maintain a semblance of true value whilst still be less uncertain.

Argument Against;

Limited options.

4 0
3 years ago
A normal cost system applies overhead to jobs ________.
seraphim [82]
By multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the job. :) hope that helped
7 0
2 years ago
You are given the following information concerning Around Town Tours:Debt: 7,500, 6.8 percent coupon bonds outstanding, with 11
gtnhenbr [62]

Answer:

9.0%

Explanation:

Calculation to determine the WACC for this firm

First step

Common stock=284,000 × $68

Common stock= $19,312,000

Second step is to calculate the Preferred stock

Preferred stock=9,000 × $88

Preferred stock= $792,000

Debt= 7,500 × .979 × $1,000

Debt = $7,342,500

Value = $19,312,000 + 792,000 + $7,342,500

Value= $27,446,500

Second step

RE = .041 + 1.04(.146-.041)

RE= .1502

RE = ($2.62 /$68) + .025

RE= .0635

Average RE = (.1502+ .0635)/2

Average RE = .1069

RP = $8/$88

RP = .0909

Fourth step

$979 = [(.068 × $1,000) / 2] × ({1- 1 / [1 + (r/ 2)]22} / (r / 2)) + $1,000 / [1 + (r / 2)]22

r = 7.08 %

Now let calculate the WACC

WACC = ($19,312,000/$27,446,500)(.1069) + ($792,000/$27,446,500)(.0909) + ($7,342,500/$27,446,500)(.0708)(1 -.34)

WACC= .090*100

WACC=9.0 %

Therefore the WACC for this firm is 9.0%

7 0
3 years ago
Sigma Corporation owns 80% of the stock of Epsilon Corporation, which pays it a dividend of $100,000. Sigma Corporation also own
kvv77 [185]

Answer:

d. $132,000

Explanation:

Sigma Corporation holds the stock of Epsilon Corporation and is subsidiary for the Sigma. The dividend declared by of $100,000 is entirely for the sigma whereas Sigma Corporation also holds 20% of the shares of Intergalactic Corporation. The dividend of $40,000 will be calculated in the dividend amount of Sigma but 20% will be deducted.

$100,000 + $40,000 * 80% = $132,000

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3 years ago
You must estimate the intrinsic value of Noe Technologies’ stock. The end-of-year free cash flow (FCF1) is expected to be $27.50
emmasim [6.3K]

Answer:

= $52.78 per share

Explanation:

<em>The value of a business can be determined using the free cash flow model. According to this model, the value of a firm is is the present value of its free cash flow discounted at the weigthed average cost of capital (WACC.)</em>

<em>The value of equity is the value of firm less value of other instruments (e.g debt and preferred stocks)</em>

<em>Value of equity = Value of the entire firm - Value of debt </em>

We can work out the the value per share using the steps below:

<em>Step 1</em>

<em>Calculate the total value of the firm</em>

Value of firm =  27.50/(0.1-0.07)

 = $916.66 million

<em>Step 2</em>

<em>Calculate the value of equity</em>

<em>Value of equity = Value of the entire firm - Value of debt</em>

= $916.66 million - $125.0 million

=791.666 million

<em>Step 3</em>

<em>Calculate the value per share</em>

Value per share = Value of equity/ units of common stock

=$791.666 million/15 million units

= $52.78 per share

3 0
3 years ago
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