Question

cia.gov /careers Canvas POSA D Question 5 3 pts Acme Corp has a target capital structure of 30% debt and 70% equity. It has $300 million in bonds outstanding with a yleld of 8% and 50 million shares of stock outstanding with a current market price of $14.00 per share. The company's beta is 1.25 and the risk-free rate of interest is 4% with a market risk premium of 6%. The firm has a tax rate of 25%. The company is looking to raise $250 million to build a second factory. The new factory will increase output substantially. The table below shows the anticipated cash flows generated from the new factory including a salvage value in year 5. What is the payback for this project? Cash Flow ($mill) u W NOS 4.25 Years 3.75 Years 3.5 Years 3.2 Years Question 6 1 pts XYZ Corporation has a beta of 1.34 with the market. The long-term average return on the market is 10% and the long-term MacBook Air AN

Answer 1

The payback period represents the time period in which the initial investment of a project is recovered.

Cumulative cash flows for 3 years is computed as follows:

= $ 35 million + $ 95 million + $ 95 million

= $ 225 million

Cumulative cash flows for 4 years is computed as follows:

= $ 35 million + $ 95 million + $ 95 million + $ 125 million

= $ 350 million

The initial investment of $ 250 million is recovered between year 3 and year 4, which implies that the payback period lies between year 3 and year 4 and is computed as follows:

= 3 years + remaining investment to be recovered / year 4 cash inflow

= 3 years + ( $ 250 million - $ 225 million ) / $ 125 million

= 3 years + 0.20

= 3.2 years

Feel free to ask in case of any query relating to this question