Question

Your firm consists of $10 million in cash and a $40 million factory (thus, your firm...

  1. Your firm consists of $10 million in cash and a $40 million factory (thus, your firm value is $50 million). You owe $40 million (either in the form of cash or factory) to a debtholder at the end of the year whose contract specifies that you cannot pay dividends until after he is repaid. You have no other liabilities. Assume the discount rate is zero.

    The only project you are considering over the next year is a $10 million sprinkler system in your factory. Without the sprinkler system there is a 50% chance that the factory will burn down overthe next year (in which case the factory’s value will drop from $40 million to $0). With the sprinklersystem there is a 0% chance the factory will burn down.

    1. Will equity holders decide to install the sprinkler system?

    2. In three sentences or less, explain intuitively why equity holders make this decision.

0 0
Add a comment Improve this question Transcribed image text
Know the answer?
Add Answer to:
Your firm consists of $10 million in cash and a $40 million factory (thus, your firm...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • 2. A firm currently has $10 million in debt, $40 million in cash, and 10 million...

    2. A firm currently has $10 million in debt, $40 million in cash, and 10 million shares outstanding. If the present value of the firm's free cash flows is $120 million, what should be its share price? 4. If the tax rate is 40%, what are the net proceeds from selling an asset for $90,000? Assume the asset originally had a book value of $20,000. 7. ReMATE Incorporate expects free cash flow earnings of $6 million next year. Since the...

  • 5. Suppose your firm receives a $4.19 million order on the last day of the year....

    5. Suppose your firm receives a $4.19 million order on the last day of the year. You fill the order with $1.82 million worth of inventory. The customer picks up the entire order the same day and pays $1.16 million upfront in​ cash; you also issue a bill for the customer to pay the remaining balance of $3.03 million within 40 days. Suppose your​ firm's tax rate is 0% ​(i.e., ignore​ taxes). Determine the consequences of this transaction for each...

  • Your firm is expected to generate free cash flows (FCFs) of $160 million annually in perpetuity....

    Your firm is expected to generate free cash flows (FCFs) of $160 million annually in perpetuity. The first FCF will occur one year from today. The corporate tax rate is 20%. The comparable firm for you company, called A-Co. has a total market value of $600 million. A-Co. has expected FCFs of $36M per year, forever. A-Co. is an all-equity company. a. Assume your company will never take on any debt. What is the value of your company? b. Now...

  • Suppose your firm receives a $5.00 million order on the last day of the year. You...

    Suppose your firm receives a $5.00 million order on the last day of the year. You fill the order with $2.00 million worth of inventory. The customer picks up the entire order the same day and pays $1.00 million up front in cash; you also issue a bill for the customer to pay the remaining balance of $4.00 million within 40 days. Suppose your firm's tax rate is 0% (i.e., ignore taxes). Determine the consequences of this transaction for each...

  • a) (2) Consider two firms: ABC: an all equity firm. It has 9 million common shares...

    a) (2) Consider two firms: ABC: an all equity firm. It has 9 million common shares outstanding, worth $40/share. XYZ: is a levered firm with 4.6 million shares at $52.50/share. Its perpetual debt has a market value of $91 million and costs 8% a year. They are identical in every other way. Both firms expect to earn $29 million before interest/year in perpetuity, with each company distributing all earnings as dividends. Neither pay taxes. Assume the debt of XYZ is...

  • Suppose your firm receives a $4.62 million order on the last day of the year. You...

    Suppose your firm receives a $4.62 million order on the last day of the year. You fill the order with $1.95 million also issue a bill for the customer to pay the remaining balance of $3.40 million within 40 days. Suppose your firm's tax rate is 0% (i.e., ignore taxes). Determine the consequences of this transaction for each of the following: a. Revenues b. Earnings c. Receivables d. Inventory e. Cash a. Revenues Revenues willby million. (Select from the drop-down...

  • Omicron Technologies has $50 million in excess cash and no debt. The firm expects to generate...

    Omicron Technologies has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicrons unlevered cost of capital is 10% and there are 10 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $50 million in excess cash as a special dividend or to use it to repurchase...

  • Your firm is considering a project that will cost $4.548 million up​ front, generate cash flows...

    Your firm is considering a project that will cost $4.548 million up​ front, generate cash flows of $3.50 million per year for 3 ​years, and then have a cleanup and shutdown cost of $6.00 million in the fourth year. a. How many IRRs does this project​ have? b. Calculate a modified IRR for this project assuming a discount and compounding rate of 10.0%. c. Using the MIRR and a cost of capital of 10.0%​, would you take the​ project? a....

  • PLEASE ANSWER USING EXCEL and put in cells viewing mode Bid Problem: Your firm has been...

    PLEASE ANSWER USING EXCEL and put in cells viewing mode Bid Problem: Your firm has been asked to submit a bid for a new computerized cash register system. The system would be installed in 50 stores per year for the next 4 years. Your firm would need to purchase $800,000 worth of specialized equipment. The CCA rate would be 30%. Your firm will be able to sell the machine for $150,000 in 4 years time. Your firm has estimated that...

  • b Your firm is considering a project that will cost $4.499 million up front, generate cash...

    b Your firm is considering a project that will cost $4.499 million up front, generate cash flows of $3.49 milion per year for 3 years, and then have a cleanup and shutdown cost of $6.03 million in the fourth year. 2. How many IRRS does this project have? b. Calculate a modified IRR for this project assuming a discount and compounding rate of 9.5% c. Using the MIRR and a cost of capital of 9.5%, would you take the project?...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT