1. Zoso is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over five years using the straight-line method. The new cars are expected to generate $125,000 per year in earnings before taxes and depreciation for five years. The company is entirely financed by equity and has a 35 percent tax rate. The required return on the company’s unlevered equity is 14 percent, and the new fleet will not change the risk of the company. The risk-free rate is 6 percent. a. What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
a) What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b) Suppose the company can purchase the fleet of cars for $340,000. Additionally, assume the company can issue $260,000 of five-year debt at the risk-free rate of 6 percent to finance the project. All principal will be repaid in one balloon payment at the end of the fifth year. What is the adjusted present value (APV) of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
2. Milano Pizza Club owns three identical restaurants popular for their specialty pizzas. Each restaurant has a debt–equity ratio of 35 percent and makes interest payments of $60,000 at the end of each year. The cost of the firm’s levered equity is 16 percent. Each store estimates that annual sales will be $1.68 million; annual cost of goods sold will be $860,000; and annual general and administrative costs will be $595,000. These cash flows are expected to remain the same forever. The corporate tax rate is 40 percent.
a) Use the flow to equity approach to determine the value of the company’s equity. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
b) What is the total value of the company? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
3. If Wild Widgets, Inc., were an all-equity company, it would have a beta of 1.4. The company has a target debt–equity ratio of .3. The expected return on the market portfolio is 12 percent, and Treasury bills currently yield 5.1 percent. The company has one bond issue outstanding that matures in 20 years and has a coupon rate of 9.2 percent. The bond currently sells for $1,190. The corporate tax rate is 40 percent.
a) What is the company’s cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b) What is the company’s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
c) What is the company’s weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)?
4. Watson, Inc., is an all-equity firm. The cost of the company’s equity is currently 11 percent, and the risk-free rate is 5.1 percent. The company is currently considering a project that will cost $11.88 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.36 million.
If the company has a tax rate of 35 percent, what is the net present value 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.)