Question

Neon Corporation’s stock returns have a covariance with the market portfolio of .0455. The standard deviation...

Neon Corporation’s stock returns have a covariance with the market portfolio of .0455. The standard deviation of the returns on the market portfolio is 20 percent, and the expected market risk premium is 7.9 percent. The company has bonds outstanding with a total market value of $55.04 million and a yield to maturity of 6.9 percent. The company also has 4.54 million shares of common stock outstanding, each selling for $24. The company’s CEO considers the current debt–equity ratio optimal. The corporate tax rate is 40 percent, and Treasury bills currently yield 3.8 percent. The company is considering the purchase of additional equipment that would cost $42.04 million. The expected unlevered cash flows from the equipment are $11.84 million per year for five years. Purchasing the equipment will not change the risk level of the company.

  

Calculate the NPV of the project. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

  NPV $   

Homework Answers

Answer #1

Npv of the project = - $10,333,400/-

Beta of stock = covariance / (standard deviation of market)2

= 0.0455/ (20)2

= 0

Stock expected rate of return = rf + beta*(risk premium)

= 3.8% + 0*7.9%

=3.8%

Bond interest rate after tax = 6.9% *(1-0.40)

= 4.14%

WACC = 3.8%*4.54*$24/164 + 4.14% *55.04/164

= 3.91%

Calculation NPV of the project:-

Annual cash flow = $ 11.84 million

Less:- tax @40% = $ 4.736 million

After tax annual cash flow(a) = $7.1040 million

Pvafactor( 3.91%,5years)(b) = 4.4632

Present value of cash flows after tax (a×b)= $31.7066 million

Less :- cost of additional equipment = $42.04 million

Npv = - $10,333,400/-

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Neon Corporation’s stock returns have a covariance with the market portfolio of .0455. The standard deviation...
Neon Corporation’s stock returns have a covariance with the market portfolio of .0455. The standard deviation of the returns on the market portfolio is 20 percent, and the expected market risk premium is 7.9 percent. The company has bonds outstanding with a total market value of $55.04 million and a yield to maturity of 6.9 percent. The company also has 4.54 million shares of common stock outstanding, each selling for $24. The company’s CEO considers the current debt–equity ratio optimal....
Neon Corporation’s stock returns have a covariance with the market portfolio of .0495. The standard deviation...
Neon Corporation’s stock returns have a covariance with the market portfolio of .0495. The standard deviation of the returns on the market portfolio is 20 percent, and the expected market risk premium is 8.3 percent. The company has bonds outstanding with a total market value of $55.08 million and a yield to maturity of 7.3 percent. The company also has 4.58 million shares of common stock outstanding, each selling for $28. The company’s CEO considers the current debt–equity ratio optimal....
Neon Corporation’s stock returns have a covariance with the market portfolio of .0385. The standard deviation...
Neon Corporation’s stock returns have a covariance with the market portfolio of .0385. The standard deviation of the returns on the market portfolio is 30 percent, and the expected market risk premium is 9.2 percent. The company has bonds outstanding with a total market value of $55.17 million and a yield to maturity of 8.2 percent. The company also has 4.67 million shares of common stock outstanding, each selling for $23. The company’s CEO considers the current debt–equity ratio optimal....
Neon Corporation’s stock returns have a covariance with the market portfolio of .0315. The standard deviation...
Neon Corporation’s stock returns have a covariance with the market portfolio of .0315. The standard deviation of the returns on the market portfolio is 20 percent, and the expected market risk premium is 8.5 percent. The company has bonds outstanding with a total market value of $55.1 million and a yield to maturity of 7.5 percent. The company also has 4.60 million shares of common stock outstanding, each selling for $30. The company’s CEO considers the current debt–equity ratio optimal....
First and Ten Corporation’s stock returns have a covariance with the market portfolio of .0481. The...
First and Ten Corporation’s stock returns have a covariance with the market portfolio of .0481. The standard deviation of the returns on the market portfolio is 18 percent and the expected market risk premium is 6.9 percent. The company has bonds outstanding with a total market value of $56.3 million and a yield to maturity of 6.5 percent. The company also has 5.5 million shares of common stock outstanding, each selling for $38. The company’s CEO considers the firm’s current...
First and Ten Corporation’s stock returns have a covariance with the market portfolio of .0501. The...
First and Ten Corporation’s stock returns have a covariance with the market portfolio of .0501. The standard deviation of the returns on the market portfolio is 22 percent and the expected market risk premium is 6.6 percent. The company has bonds outstanding with a total market value of $56.7 million and a yield to maturity of 6.9 percent. The company also has 5.9 million shares of common stock outstanding, each selling for $34. The company’s CEO considers the firm’s current...
First and Ten Corporation’s stock returns have a covariance with the market portfolio of .0476. The...
First and Ten Corporation’s stock returns have a covariance with the market portfolio of .0476. The standard deviation of the returns on the market portfolio is 23 percent and the expected market risk premium is 7.1 percent. The company has bonds outstanding with a total market value of $56.2 million and a yield to maturity of 6.4 percent. The company also has 5.4 million shares of common stock outstanding, each selling for $39. The company’s CEO considers the firm’s current...
First and Ten Corporation’s stock returns have a covariance with the market portfolio of .0456. The...
First and Ten Corporation’s stock returns have a covariance with the market portfolio of .0456. The standard deviation of the returns on the market portfolio is 19 percent and the expected market risk premium is 7.1 percent. The company has bonds outstanding with a total market value of $55.8 million and a yield to maturity of 6 percent. The company also has 5 million shares of common stock outstanding, each selling for $43. The company’s CEO considers the firm’s current...
You have asset ABC. Its covariance with the market portfolio is 0.01. The expected price of...
You have asset ABC. Its covariance with the market portfolio is 0.01. The expected price of the market portfolio is $120. Its current price is $100. The standard deviation of the market portfolio returns is 20%. The risk free rate is 5%. (a) What is the expected return of company ABC? (b) What is the expected return of company XYZ if the covariance of its returns with the market is 0.05?
The stock of a Company has a beta of 1.2 has a standard deviation of returns...
The stock of a Company has a beta of 1.2 has a standard deviation of returns of 25%. The market portfolio is expected to return 12% and the risk-free rate is 2%. If the market portfolio has a standard deviation of 15%, how much of the risk of XYZ stock is market risk and how much is non-market risk?