Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.63, expects to generate free cash flow of $54 million this year, and anticipates a 4% perpetual growth rate. The industrial chemicals division has an asset beta of 1.01, expects to generate free cash flow of $61 million this year, and anticipates a 3% perpetual growth rate. Suppose the risk-free rate is 3% and the market risk premium is 4%. a. Estimate the value of each division. b. Estimate Weston's current equity beta c. Estimate Weston's current cost of capital. Is this cost of capital useful for valuing Weston's projects? How is Weston's equity beta likely to change over time?
Q: For the following loan, make a table showing the amount of each monthly payment that goes toward…
A: Loans are paid by the equal monthly installments and these monthly installments carry the payment…
Q: Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes…
A: NPV is Net Present Value that is a Capital Budgeting technique. It uses the discounted cash flows to…
Q: A corporate bond pays interest twice a year and has 22 years to maturity, a face value of $1,000 and…
A: Yield to maturity is return earned by a bondholder till its maturity and is calculated using RATE…
Q: Consider the following information: Put Premium: $0.46 Strike Price: $32.82 Price of the underlying…
A: A protective put strategy is a way for investors to protect themselves from any negative change in…
Q: Give typing answer with explanation and conclusion What would the YTC on an 8.5% annual coupon…
A: YTC is the yield to call of the bond. This is the return received by the bond holder if the bond is…
Q: In a binomial model, a call option and a put option are both written on the same stock. The exercise…
A: Options are derivative instruments that provide the choice of exercise for the purchase/sale of the…
Q: investor is considering the acquisition of a “distressed property” which is on Northlake Bank’s REO…
A: the acquisition of the distressed property would be financially feasible. In order to determine the…
Q: A stock is currently trading a $10. In one year, the stock will be worth either $11 or $9. The…
A: To calculate the value of a put option with a strike of $10 that expires in one year, we can use the…
Q: The following is market data as of the close of each year for the shares of General Motors (GM) and…
A: A minimum variance portfolio is a portfolio of assets that has the lowest possible variance, or…
Q: Your company is considering a capital project that will require a net initial investment of…
A: Initial investment = $244,978 Period of project = 7 years Annual net cash inflows = $40,860
Q: Solve for CDL’s current cost of equity and weighted average cost of capital. Show all relevant…
A: Companies fund their operations by issuing common shares or by raising debt. The proportion of…
Q: Harold Hill borrowed $15,000 to pay for his child's education at Riverside Community College. Harold…
A: The borrowed amount = $15,000 The interest rate = 4 1/4% = 4.25% The time period = 8 months
Q: T&G Ltd has only £600,000 to invest and four possible projects, as follows: Project Initial…
A: NPV means difference of present value of cash inflows and present value of cash outflows. Project is…
Q: A firm has a market value equal to its book value. Currently, the firm has $500,000 of excess cash,…
A: The number of shares outstanding refers to the shares currently circulated in the market. Share…
Q: Investors expect to earn a return of 24.3% on Amalgamated Industries this year. Treasuries currently…
A: Expected return = 24.3% Treasuries yield = 3.4%
Q: 1) If Taylor Swift is evaluating a project with the given cash flow and weighted average cost of…
A: Net present value is the modern methods of capital budgeting that is used to determine the present…
Q: You have decided to buy a car that costs $31,000. Since you do not have a big down payment, the…
A: We need to use loan amortisation formula to calculate monthly payment of loan PMT =…
Q: Liability A B с Market Value $4.25 Bln $5.75 Bln $3.50 Bln Bond D E It has $13.50 Bln available cash…
A: Modified duration shows how much would be change in the value of assets if there is change in…
Q: An oil company executive is considering investing $10.7 million in one or both of two wells: well 1…
A: Net present values are calculated to determine the profitability of the project by using Discounted…
Q: A new project will have an intial cost of $12,000. Cash flows from the project are expected to be…
A: Initial cost = $12,000 Cash flow in year 1 = cf1 = $6000 Cash flow in year 2 = cf2 = $5000 Cash flow…
Q: Consolidated Industries is growing quickly. Dividends are expected to grow at a 15 percent rate for…
A: Growth rate for 3 years = G = 15% Constant growth rate after 3 years = g = 1.5% Required rate of…
Q: Cash flows from a new project are expected to be $4,000, $5,000, and $3,000 over the next 3 years,…
A: To calculate the PI ratio we will use the below formula PI = Present value of cash inflows/Initial…
Q: Suppose that the US price index is 100.0 in 1985 and 216.4 in 2015 (30 years). What is the average…
A: Here, US Price Index in 1985 is 100 US Price Index in 2015 is 216.4 Time Period is 30 years
Q: The Riverton Company, announced a $949,312 million expansion of lodging properties, ski lifts, and…
A: Internal rate of return is a concept of capital budgeting that is helpful in decision-making by…
Q: The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to be…
A:
Q: Consider a European call option for a non-dividend paying stock currently priced at S(0) with strike…
A: A call price is the difference in the stock price and the strike price at the end of the term of the…
Q: Which of the following is the least riskiest? a. Future b. Options c. Common stocks d. Corporate…
A: We are required to compare Future contracts, option contracts, common stocks and corporate bonds…
Q: ents V A V 10 of 11 Part C Since she was 25, Jenna has been saving $5,000 each year in her IRA. Her…
A: Annuity is a series of equal payments at equal interval for a specified period. With periodic…
Q: Calculate the monthly payment from the following information by formula. (Do not round intermediate…
A: Compound = monthly = 12 Time = t = 48 months Present value = pv = $4560 Interest rate = r = 13.5 /…
Q: a. Assuming the card holder had no new interest, determine his minimum payment due on December 1,…
A: First, we need to determine the total outstanding principal as the sum of all purchases. Since there…
Q: Sly, a plastics processor, is considering the purchase of a high-speed extruder as one option. The…
A: Net present value analysis refers to the method used for computing whether the investment is…
Q: 8. In a single-factor market, the SML relationship of both the CAPM and the APT states that the risk…
A: The Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT) are two financial…
Q: Hewlett Plastics Inc. received a loan of $48,500 at 3.50% compounded quarterly to purchase machinery…
A: A loan is a financial arrangement in which one or more people, companies, or other entities lend…
Q: A project has the following cash flows: Year Cash Flows 0 -$ 11,500 1 4,990 2 7,180 3 4,640 4 -1,680…
A: First of all, find the future value of all the cash inflows, take take it as the amount, assume…
Q: A project's internal rate of return (IRR) is the that forces the PV of the expected future cash…
A: The IRR is the investment discount rate that corresponds to the difference between the original…
Q: Explain the relation between current and future expected one-year bond yields and the yield on a…
A: The bond yield and the interest rates are the terms used to evaluate bonds and both terms are used…
Q: Company has a capital structure of 55% total equity, 35% debt, and 10% common stock Lisa is…
A: WACC stands for Weighted Average Cost of Capital. It is a financial metric that calculates the…
Q: PLEASE DONT USE EXCEL FOR SOLUTION Nabil Stafanous purchased a truck for his construction company.…
A: Installment is that which includes the interest and principal both the amount as per terms and…
Q: Date 1/2/2008 2/6/2008 5/7/2008 3/6/2008 1/5/2008 1/2/2009 Price $86.62 79.91 84.55 65.40 49.55…
A: When positive cash flows are considered to be re-invested, then the return is measured in terms of…
Q: How long will it take $1128.00 to accumulate to $1299.00 at 5% p.a. compounded semi-annually? State…
A: The amount that a present investment will gain in value over time when kept in a compound interest…
Q: A firm is considering replacing the existing industrial air conditioning unit. They will pick one of…
A: EAC is used to compare investments or projects with different lifespans or time horizons, by…
Q: Compute the rate (in %) for the loan. Round answers to the nearest tenth of a percent; use ordinary…
A: Principal Amount = p = $185,000 Time = t = 2 years Interest amount = i = $24,050
Q: How the BONUS depreciation helps the businesses and why you think bonus depreciation was introduced.…
A: Bonus depreciation is a tax incentive introduced by the US government that allows businesses to…
Q: Assuming infinite replication and a cost of capital of 10.5 percent, determine the net present value…
A: One of two strategies used in capital budgeting to assess projects that operate independently with…
Q: Reading the chart give a financial summary Team Information Team Name Team Number Location Footprint…
A: The financial summary for the proposed project includes a comprehensive analysis of various aspects…
Q: Stocks A and B have the following returns: (Click on the following icon in order to copy its…
A: A portfolio is the combination of stocks, assets, bonds, commodities that an investor form in order…
Q: had net income (earnings) this last year of $9.465.765.00 and had 2,280,907 common shares…
A: Return on Equity refers to the ability of the company to earn profits on its investment RO
Q: Ray Flagg took out a 60-month fixed installment loan of $12,000 to open a new pet store. He paid no…
A: Monthly payment = $221 Number of monthly payments = 60 Loan amount = $12,000
Q: LuSE (Lusaka Securities Exchange) has been voted as one of the top 10 best performing securities…
A: The performance of securities markets in Africa can be evaluated based on various factors, such as…
Q: Total Interest Paid. Lloyd and Jean are considering purchasing a home requiring a $100,000 mortgage.…
A: The difference between interest payment of two different maturities can be calculated Total payment…
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 5 images
- Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.52, expects to generate free cash flow of $49 million this year, and anticipates a 4% perpetual growth rate. The industrial chemicals division has an asset beta of 1.09, expects to generate free cash flow of $74 million this year, and anticipates a 3% perpetual growth rate. Suppose the risk-free rate is 2% and the market risk premium is 5%. a. Estimate the value of each division. b. Estimate Weston's current equity beta c. Estimate Weston's current cost of capital. Is this cost of capital useful for valuing Weston's projects? How is Weston's equity beta likely to change over time? *** a. Estimate the value of each division. The cost of capital for the soft drink division is%. (Round to two decimal places.)Pear Inc. has an equity beta of 2. The expected market return is 20% and the risk free rate is 5%. The firm is financed half through equity and half through debt. Assume perfect capital markets. 1. Assume Pear’s management decides to decrease leverage to 1/3 of firm value. Estimate Pear’s cost of equity, cost of debt and cost of capital. Explain your workings 2. Assume Pear is expected to generate a cash flow of $300 million next year. This cash flow will grow in perpetuity at a rate of 10%. The capital structure is as in question 1 above. Pear has 10 million shares outstanding. Calculate Pear’s share price. Explain your workings.Suppose Alcatel-Lucent has an equity cost of capital of 9.5%, market capitalization of $11.84 billion, and an enterprise value of $16 billion. Assume Alcatel-Lucent's debt cost of capital is 6.8%, its marginal tax rate is 35%, the WACC is 8.18%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? Data table af (Click on the following icon in order to copy its contents into a spreadsheet.) Year 0 1 2 100 48 103 FCF ($ million) D=dxV 49.21 40.75 Interest 0.00 3.35 17.31 2.77 3 72 0.00 1.18 - X
- Suppose Alcatel-Lucent has an equity cost of capital of 10.2%, market capitalization of $11.20 billion, and an enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 6.5%, its marginal tax rate is 33%, the WACC is 9.03%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year FCF ($ million) D=dxv Interest 0 1 2 3 - 100 55 103 74 38.84 31.34 13.57 0.00 0.00 2.52 2.04 0.88 toSuppose Alcatel-Lucent has an equity cost of capital of 9.1%, market capitalization of $10.36 billion, and an enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 5.5%, its marginal tax rate is 34%, the WACC is 7.68%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? a. What is the free cash flow to equity for this project? The free cash flow to equity for this project is: (Round all answers to two decimal places. Use a minus sign to indicate a negative number.) Year 1 2 FCFE ($ million) 0 3 Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 1 FCF ($ million) D=dxV² 45 39.60 Interest 2.62 0 - 100 47.64 0.00 Print Done 2 99…Suppose Alcatel-Lucent has an equity cost of capital of 10.3%, market capitalization of $11.20 billion, and an enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 6.5%, its marginal tax rate is 32%, the WACC is 9.12%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? a. What is the free cash flow to equity for this project? The free cash flow to equity for this project is: (Round all answers to two decimal places. Use a minus sign to indicate a negative number.) Year FCFE ($ million) 0 1 2 3
- The FMS Corporation needs to raise investment money amounting to $40 million in new equity. The firm’s market risk is βM = 1.4, which means the firm is believed to be riskier than the market average. The risk free interest rate is 2.8% and the average market return is 9% per year. What is the cost of equity for the $40 million?A firm has decided that its optimal capital structure is 100% equity-financed. It perceives its optimal dividend policy to be a 60% payout ratio. Asset turnover is sales/assets = 0.6, the profit margin is 10%, and the firm has a target growth rate of 3%. a-1. Calculate the sustainable growth rate. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) a-2. Is the firm’s target growth rate consistent with its other goals? b. If the firm’s target growth rate is not consistent with its other goals, what would asset turnover need to be to achieve its goals? (Do not round intermediate calculations. Round your answer to 3 decimal places.) c. If the firm’s target growth rate is not consistent with its other goals, how high would the profit margin need to be to achieve its goals? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)XYZ is currently an all-equity firm with a total market value of $1,000,000. Earnings beforeinterest and taxes (EBIT) are projected to be $80,000 if economic conditions are normal. Ifthere is strong expansion in the economy, then EBIT will be 20% higher. If there is arecession, then EBIT will be 30% lower. The three states of the economy are equallylikely. XYZ is considering a (perpetual) debt issue of $150,000 with an interest (i.e.,coupon) rate of 6%. The proceeds will be used to repurchase shares of stock. There arecurrently 25,000 shares outstanding. Suppose that XYZ pays no taxes (that is, the tax rateis 0%). a) Calculate earnings per share, EPS, under each of the three economic scenariosbefore any debt is issued.Also, calculate the percentage changes in EPS when the economy expands orenters a recession. b) Repeat part (a) assuming that XYZ goes through with the recapitalization (that is,XYZ issues debt to repurchase shares at the current market price). Explain yourfindings.
- Suppose a firm has a free cash flow of $10,000,000 and that it is expected to grow at 5%. Their cost of equity is 13% and their WACC is 9%. Use the Gordon Growth Model to find the value of this firmXYZ is currently an all-equity firm with a total market value of $1,000,000. Earnings beforeinterest and taxes (EBIT) are projected to be $80,000 if economic conditions are normal. Ifthere is strong expansion in the economy, then EBIT will be 20% higher. If there is arecession, then EBIT will be 30% lower. The three states of the economy are equallylikely. XYZ is considering a (perpetual) debt issue of $150,000 with an interest (i.e.,coupon) rate of 6%. The proceeds will be used to repurchase shares of stock. There arecurrently 25,000 shares outstanding. Suppose that XYZ pays no taxes (that is, the tax rateis 0%).a) Calculate earnings per share, EPS, under each of the three economic scenariosbefore any debt is issued.Also, calculate the percentage changes in EPS when the economy expands orenters a recession.) Suppose a firm has a free cash flow of $10,000,000 and that it is expected to grow at 5%. Their cost of equity is 13% and their WACC is 9%. Use the Gordon Growth Model to find the value of this firm. P