The Also Horns Corp. is planning on introducing a new line of saxophones. They e

Question

The Also Horns Corp. is planning on introducing a new line of saxophones. They expect sales to be $400,000 with total fixed and variable costs representing 70% of sales. The discounted rate of the unlevered equity is 17%, but the firm plans to raise $144,385 of the initial $450,000 investment as 9% perpetual debt. The corporate tax rate is 40% and the target debt to asset (or value) ratio is 0.3.

QUESTION 80

1. Suppose the FTE approach is used to evaluate the project for the next 3 questions.

Use the information in Problem 76,

How much is the levered cash flow?

$42,250

$48,000

$55,236

$64,203

$70,520

1 points   

QUESTION 81

1. What is the rS, discount rate for the equity of the levered firm?

16.25%

18.14%

19.06%

19.67%

20.20%

1 points   

QUESTION 82

1. What is the Initial Net Equity Investment?

$200,000

$225,500

$250,500

$275,500

$305,615

1 points   

QUESTION 83

1. For the next question suppose the WACC approach is used to evaluate the project.

Use the information in Problem 76,

What is the rWACC of the project?

12.48%

13.33%

14.96%

15.23%

18.34%

Explanation / Answer

1:Levered cash flow = (Sales- Costs- Interest)*(1-Tax)

=( 400000-70%*400000- 144385*9%)*(1-40%)

= 107005*60%

= 64203

2: rS       = r0 + (B/S)(r0 – rb)(1 – TC)

rs= 0.17+ (30/70)*(0.17-0.09)*(1-0.4)

=19.06%

3: Initial net equity investment = 450000-144385 = 305615

4: WACC= Wd*Kd+ We*Ke

= 0.3*9%*(1-0.4)+ 0.7*19.06%

=14.96%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.