What the price increase on the firm


Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $11.90 million. This investment will consist of $3.00 million for land and $8.90 million for trucks and other equipment. The land, all trucks, and all other equipment is expected to be sold at the end of 10 years at a price of $5.26 million, $2.03 million above book value. The farm is expected to produce revenue of $2.06 million each year, and annual cash flow from operations equals $1.89 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment.

The project should be.

Problem 12.24Chip’s Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite for $20, then the demand for the product will be 15,000 bottles per year, whereas sales will be 86 percent as high if the price is raised 13 percent. Chip’s variable cost per bottle is $10, and the total fixed cash cost for the year is $100,000. Depreciation and amortization charges are $20,000, and the firm has a 30 percent marginal tax rate. Management anticipates an increased working capital need of $3,000 for the year. What will be the effect of the price increase on the firm’s FCF for the year?

At $20 per bottle the Chip’s FCF is $ and at the new price Chip’s FCF is $.

Problem 13.11Capital Co. has a capital structure, based on current market values, that consists of 43 percent debt, 14 percent preferred stock, and 43 percent common stock. If the returns required by investors are 8 percent, 11 percent, and 16 percent for the debt, preferred stock, and common stock, respectively, what is Capital’s after-tax WACC? Assume that the firm’s marginal tax rate is 40 percent.

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Finance Basics: What the price increase on the firm
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