Question

Need ASAP

Just Answers

Question 51

Not yet answered

Marked out of 1.00

Not flaggedFlag question

Question text

Bob's is a retail chain of specialty hardware stores. The firm has 21,000 shares of stock outstanding that are currently valued at $68 a share and provide a 13.2 percent rate of return. The firm also has 500 bonds outstanding that have a face value of $1,000, a market price of $1,068, and a 7 percent coupon. These bonds mature in 6 years and pay interest semiannually. The tax rate is 35 percent. The firm is considering expanding by building a new superstore. The superstore will require an initial investment of $12.3 million and is expected to produce cash inflows of $1.1 million annually over its 10-year life. The risks associated with the superstore are comparable to the risks of the firm's current operations. The initial investment will be depreciated on a straight line basis over the life of the project. At the end of the 10 years, the firm expects to sell the superstore for $6.7 million. Should the firm accept or reject the superstore project and why?

Select one:

a. Accept; the project's NPV is $1.27 million.

b. Accept; the NPV is $4.89 million.

c. Reject; the NPV is $1.06 million.

d. Reject; the NPV -$3.27 million.

e. Reject; the NPV is -$5.71 million.

Question 52

Not yet answered

Marked out of 1.00

Not flaggedFlag question

Question text

Chick 'N Fish is considering two different capital structures. The first option consists of 25,000 shares of stock. The second option consists of 15,000 shares of stock plus $150,000 of debt at an interest rate of 7.5 percent. Ignore taxes. What is the break-even level of earnings before interest and taxes (EBIT) between these two options?

Select one:

a. $2,813

b. $3,134

c. $16,410

d. $28,125

e. $31,338

Question 53

Not yet answered

Marked out of 1.00

Not flaggedFlag question

Question text

Gabe's Market is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $225,000 in debt. Plan II would result in 14,000 shares of stock and $150,000 in debt. The interest rate on the debt is 8 percent. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $45,000. The all-equity plan would result in 20,000 shares of stock outstanding. Of the three plans, the firm will have the highest EPS with _____ and the lowest EPS with ____.

Select one:

a. Plan I; Plan II

b. Plan I; all-equity plan

c. Plan II; Plan I

d. Plan II; all-equity plan

e. all-equity plan; Plan I

Question 54

Not yet answered

Marked out of 1.00

Not flaggedFlag question

Question text

Which one of the following is an example of a direct bankruptcy cost?

Select one:

a. Operating at a debt-equity ratio that is less than the optimal ratio

b. Reducing the dividend payout ratio as a means of increasing a firm's equity

c. Forgoing a positive net present value project to conserve current cash

d. Incurring legal fees for the preparation of bankruptcy filings

e. Losing a key customer due to concerns over a firm's financial viability

Question 55

Not yet answered

Marked out of 1.00

Not flaggedFlag question

Question text

The Christmas Tree Farms, Inc. currently has 45,000 shares of stock outstanding and no debt. The price per share is $17.50. The firm is considering borrowing funds at 7.5 percent interest and using the proceeds to repurchase 4,000 shares of stock. Ignore taxes. How much is the firm borrowing?

Select one:

a. $52,500

b. $70,000

c. $110,500

d. $125,000

e. $140,000

Answer 1

51.
Initial investment = $12,300,000
N = 10 years
Annual cash flow = $1,100,000
Salvage value = $6,700,000
WACC = 10.61%

PV factor $1 annuity for period n and discount rate r = (1 - 1/ (1+ r) ^n) / r

PV factor of $1 for period n and discount rate r = 1/ (1 + r) ^n

NPV = PV of annual cash flows + PV of salvage value - Initial investment

= $1,100,000 * (1 - 1/ (1+ r) ^n) / r + $6,700,000 * 1/ (1 + r) ^n - $12,300,000

= $1,100,000 * (1 - 1 / (1+ 10.61%) ^10)/ 10.61% + $6,700,000 * 1/ (1 + 10.61%)^10 - $12,300,000

= - $3270358.45

NPV = -$3.27 million

NPV is negative. so reject the Project.

Correct answer is Option d.