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 .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 of $687,000 and is expected to result in a $107,000 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 6 percent until the end of the fifth year and remain constant forever thereafter. |

Calculate the NPV of the project. |

NPV | $ |

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 .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 .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 .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 .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...

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
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8. An all-equity firm is considering financing its next
investment project with a combination of equity and debt. The asset
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equity beta for a “levered” firm). Assume the average rate of
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(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
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Comedy, Inc. has a debt-equity ratio of 0.54. The firm is
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Suppose that Rose Industries is considering the acquisition of
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ratio of 1, its marginal tax rate is 40%, its cost of debt rD is
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