The R-Bar-M Ranch in Montana would like a new mechanized barn, which will require a $600,000...
- The R-Bar-M Ranch in Montana would like a new mechanized barn, which will require a $600,000 initial cash outlay. The barn is expected to provide after-tax annual cash savings of $90,000 indefinitely (for practical purposes of computation, forever). The ranch, which is incorporated and has a public market for its stock, has a weighted average cost of capital of 14.5 percent. For this project, Mark O. Witz, the president, intends to provide $200,000 from a new debt issue and another $200,000 from a new issue of common stock. The balance of the financing would be provided internally by retaining earnings. The present value of the after-tax flotation costs on the debt issue amount to 2 percent of the total debt raised, whereas flotation costs on the new common stock issue come to 15 percent of the issue. What is the net present value of the project after allowance for flotation costs? Should the ranch invest in the new barn?
Homework Answers
Answer:
Out flows:
Initial outlay = $600,000
Flotation cost:
Debt after tax flotation cost in % = 2%
Debt flotation cost = 200000 / (100% - 2%) * 2% = $4081.633
Equity flotation cost in % = 15%
Equity flotation cost = 200000 / (100% - 15%) * 15% =$35,294.118
Total flotation costs = 4081.633 + 35294.118 = $39375.751
Inflows:
Expected to generate perpetual after tax annual cash savings = $90,000
WACC = 14.5%
Present Value of inflows = Perpetual after tax annual cash savings / WACC = 90000 / 14.5% = $620,689.655
NPV:
Net present value of the project after allowance for flotation costs = 620689.655 - 600,000 - 39375.751 = - $18,686.10
Net present value of the project after allowance for flotation costs = - $18,686.10
The ranch should not invest in the new barn. The NPV is negative.
Add Answer to:
The R-Bar-M Ranch in Montana would like a new mechanized barn,
which will require a $600,000...
Thinking Hat would like to start a new project which will require $27 million in the...
Thinking Hat would like to start a new project which will require $27 million in the initial cost. The company is planning to raise this amount of money by selling new corporate bonds. It will generate no internal equity for the foreseeable future. Thinking Hat has a target capital structure of 60 percent common stock, 12 percent preferred stock, and 28 percent debt. Flotation costs for issuing new common stock are 9 percent, for new preferred stock, 9 percent, and...
Thinking Hat would like to start a new project which will require $23 million in the...
Thinking Hat would like to start a new project which will require $23 million in the initial cost. The company is planning to raise this amount of money by selling new corporate bonds. It will generate no internal equity for the foreseeable future. Thinking Hat has a target capital structure of 70 percent common stock, 11 percent preferred stock, and 19 percent debt. Flotation costs for issuing new common stock are 13 percent, for new preferred stock, 8 percent, and...
Thinking Hat would like to start a new project which will require $27 million in the...
Thinking Hat would like to start a new project which will require $27 million in the initial cost. The company is planning to raise this amount of money by selling new corporate bonds. It will generate no internal equity for the foreseeable future. Thinking Hat has a target capital structure of 60 percent common stock, 12 percent preferred stock, and 28 percent debt. Flotation costs for issuing new common stock are 9 percent, for new preferred stock, 9 percent, and...
Thinking Hat would like to start a new project which will require $23 million in the...
Thinking Hat would like to start a new project which will require $23 million in the initial cost. The company is planning to raise this amount of money by selling new corporate bonds. It will generate no internal equity for the foreseeable future. Thinking Hat has a target capital structure of 55 percent common stock, 10 percent preferred stock, and 35 percent debt. Flotation costs for issuing new common stock are 14 percent, for new preferred stock, 8 percent, and...
Thinking Hat would like to start a new project which will require $25 million in the...
Thinking Hat would like to start a new project which will require $25 million in the initial cost. The company is planning to raise this amount of money by selling new corporate bonds. It will generate no internal equity for the foreseeable future. Thinking Hat has a target capital structure of 55 percent common stock, 12 percent preferred stock, and 33 percent debt. Flotation costs for issuing new common stock are 12 percent, for new preferred stock, 8 percent, and...
Thinking Hat would like to start a new project which will require $23 million in the...
Thinking Hat would like to start a new project which will require $23 million in the initial cost. The company is planning to raise this amount of money by selling new corporate bonds. It will generate no internal equity for the foreseeable future. Thinking Hat has a target capital structure of 65 percent common stock, 11 percent preferred stock, and 24 percent debt. Flotation costs for issuing new common stock are 15 percent, for new preferred stock, 9 percent, and...
Thinking Hat would like to start a new project which will require $28 million in the...
Thinking Hat would like to start a new project which will require $28 million in the initial cost. The company is planning to raise this amount of money by selling new corporate bonds. It will generate no internal equity for the foreseeable future. Thinking Hat has a target capital structure of 65 percent common stock, 8 percent preferred stock, and 27 percent debt. Flotation costs for issuing new common stock are 10 percent, for new preferred stock, 5 percent, and...
Cal Poly Corporation would like to start a new project: building a high-tech rose float for...
Cal Poly Corporation would like to start a new project: building a high-tech rose float for the next regional contest. This rose float project will require $35,000 in the initial cost. The company is planning to raise this amount of money by selling new corporate bonds and new stocks. It has a target capital structure of 40 percent common stock, and 60 percent debt. Flotation costs for issuing new common stock is 7%, and for new debt it is 4%....
what is r n (new common stock issue)? what is r p (new preferred stock issue)?...
what is r n (new common stock issue)?
what is r p (new preferred stock issue)?
what is r d (before tax rate on bonds)?
what is r i (after tax rate on bonds)?
what is r r (retained earnings)?
Company XYZ will pay in exactly one year $4 in dividends per share to its common stock shareholders. In exactly one year it will pay $2 in dividends per share to holders of its preferred stock. The flotation costs on...
what is r n (new common stock issue)? what is r p (new preferred stock issue)?...
what is r n (new common stock issue)? what is r p (new preferred stock issue)? what is r d (before tax rate on bonds)? what is r i (after tax rate on bonds)? -what is r r (retained earnings)? Company XYZ will pay in exactly one year $4 in dividends per share to its common stock shareholders. In exactly one year it will pay $2 in dividends per share to holders of its preferred stock. The flotation costs on...
Thinking Hat would like to start a new project which will require $23 million in the initial cost. The company is planning to raise this amount of money by selling new corporate bonds. It will generate no internal equity for the foreseeable future. Thinking Hat has a target capital structure of 55 percent common stock, 10 percent preferred stock, and 35 percent debt. Flotation costs for issuing new common stock are 14 percent, for new preferred stock, 8 percent, and...
Thinking Hat would like to start a new project which will require $25 million in the initial cost. The company is planning to raise this amount of money by selling new corporate bonds. It will generate no internal equity for the foreseeable future. Thinking Hat has a target capital structure of 55 percent common stock, 12 percent preferred stock, and 33 percent debt. Flotation costs for issuing new common stock are 12 percent, for new preferred stock, 8 percent, and...
Thinking Hat would like to start a new project which will require $28 million in the initial cost. The company is planning to raise this amount of money by selling new corporate bonds. It will generate no internal equity for the foreseeable future. Thinking Hat has a target capital structure of 65 percent common stock, 8 percent preferred stock, and 27 percent debt. Flotation costs for issuing new common stock are 10 percent, for new preferred stock, 5 percent, and...
what is r n (new common stock issue)?
what is r p (new preferred stock issue)?
what is r d (before tax rate on bonds)?
what is r i (after tax rate on bonds)?
what is r r (retained earnings)?
Company XYZ will pay in exactly one year $4 in dividends per share to its common stock shareholders. In exactly one year it will pay $2 in dividends per share to holders of its preferred stock. The flotation costs on...
what is r n (new common stock issue)? what is r p (new preferred stock issue)? what is r d (before tax rate on bonds)? what is r i (after tax rate on bonds)? -what is r r (retained earnings)? Company XYZ will pay in exactly one year $4 in dividends per share to its common stock shareholders. In exactly one year it will pay $2 in dividends per share to holders of its preferred stock. The flotation costs on...
Most questions answered within 3 hours.
-
3. (10 pts) You grow a corn crop that yields 150 bushels ac-1,
with the following...
asked 9 minutes ago -
7. The term Six Sigma refers to:
Select one:
a. The control limits established in a...
asked 18 minutes ago -
Wildhorse Company follows the practice of pricing its inventory
at the lower-of-cost-or-market, on an individual-item
basis....
asked 20 minutes ago -
For the following reaction: A(g) + 2 B(g) ⇌ 2 C(g) Calculate the
equilibrium constant K...
asked 21 minutes ago -
Which of the following best describes tidal volume? options:
1.The amount of oxygen in the air...
asked 37 minutes ago -
1. Smaller cost distortions occur when the traditional systems'
single indirect-cost rate and the activity-cost-driver rates:...
asked 45 minutes ago -
Using either a FMECA approach or some other appropriate RCA
tool, identify five risk treatment actions...
asked 45 minutes ago -
If for a test the P-value is between 0.0025 and 0.005, what
conclusion can you draw?...
asked 58 minutes ago -
Using Python. Write a function clean2(aList) that takes a list
of integers aList as argument, and...
asked 1 hour ago -
Intrapreneurship is defined as the
development of an enterprise culture with an existing (Nandan,
2009). An...
asked 1 hour ago -
QUESTION 1 Tamiflu is a drug used to treat influenza. A study
found that Tamiflu reduced...
asked 1 hour ago -
Which of the following would be less likely to be used to
allocate factory overhead when...
asked 1 hour ago