Question

Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .35, but the industry target debt-equity ratio is .30. The industry average beta is 1.15. The market risk premium is 6.3 percent and the risk-free rate is 3.9 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 22 percent. The project requires an initial outlay of $795,000 and is expected to result in a $95,000 cash inflow at the end of the first year. The project will be financed at the company’s target debt-equity ratio. Annual cash flows from the project will grow at a constant rate of 5 percent until the end of the fifth year and remain constant forever thereafter. Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer #1

Blue Angel, Inc., a private firm in the holiday gift industry,
is considering a new project. The company currently has a target
debt–equity ratio of .30, but the industry target debt–equity ratio
is .25. The industry average beta is 1.40. The market risk premium
is 8 percent, and the risk-free rate is 6 percent. Assume all
companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 35 percent. The project requires an
initial outlay...

Blue Angel, Inc., a private firm in the holiday gift industry,
is considering a new project. The company currently has a target
debt–equity ratio of .30, but the industry target debt–equity ratio
is .25. The industry average beta is 1.40. The market risk premium
is 8 percent, and the risk-free rate is 6 percent. Assume all
companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 35 percent. The project requires an
initial outlay...

Blue Angel, Inc., a private firm in the holiday gift industry,
is considering a new project. The company currently has a target
debt–equity ratio of .45, but the industry target debt–equity ratio
is .40. The industry average beta is 1.30. The market risk premium
is 7 percent, and the risk-free rate is 5 percent. Assume all
companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 34 percent. The project requires an
initial outlay...

Blue Angel, Inc., a private firm in the holiday gift industry,
is considering a new project. The company currently has a target
debt-equity ratio of .40, but the industry target debt-equity ratio
is .45. The industry average beta is 1.20. The market risk premium
is 6.8 percent and the risk-free rate is 4.4 percent. Assume all
companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 22 percent. The project requires an
initial outlay...

Blue Angel, Inc., a private firm in the holiday gift industry,
is considering a new project. The company currently has a target
debt-equity ratio of .70, but the industry target debt-equity ratio
is .75. The industry average beta is 1.10. The market risk premium
is 6.5 percent and the risk-free rate is 4.5 percent. Assume all
companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 21 percent. The project requires an
initial outlay...

Blue Angel, Inc., a private firm in the holiday gift industry,
is considering a new project. The company currently has a target
debt–equity ratio of .40, but the industry target debt–equity ratio
is .35. The industry average beta is 1.20. The market risk premium
is 8 percent, and the risk-free rate is 6 percent. Assume all
companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 40 percent. The project requires an
initial outlay...

Doubleday Brewery is considering a new project.
The company currently has a target debt–equity ratio of .40, but
the industry target debt–equity ratio is .25. The industry average
beta is 1.08. The market risk premium is 8 percent, and the
(systematic) risk-free rate is 2.4 percent.
Assume all companies in this industry can issue debt at the
risk-free rate. The corporate tax rate is 21 percent. The project
will be financed at Doubleday’s target debt–equity ratio. The
project requires an...

(1)You are thinking of starting a new project. You do a
cash-flow analysis and estimate that the project will give you a
free cash flow of $50M in one year and the free cash flows will
grow at a rate of 2% per year perpetually.
The equity beta for a firm
similar to your proposed project is 1.4. This similar firm has
$300M of risk-free debt outstanding and has 300 million shares,
each valued at $5 each. It also has...

Comedy, Inc. has a debt-equity ratio of 0.54. The firm is
analyzing a new project which requires an initial cash outlay of
$430,000 for equipment. The flotation cost is 8.6 percent for
equity and 5 percent for debt. What is the initial cost of the
project including the flotation costs?

The manager of Joytechs is considering investing in a new
project based on the following information.
Joytechs' Market Value Balance Sheet ($ Millions) and
Cost of Capital
Assets
Liabilities
Cost of Capital
Cash
0
Debt
300
Debt
6%
Other Assets
500
Equity
200
Equity
12%
Tax rate (τc)
31%
Joytechs' New Project Free Cash Flows
(Millions)
Year
0
1
2
3
Free Cash Flows
($120)
$60
$80
$70
The manager assumes that this new project is of average risk for...

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