Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 30% of the company's present value, and you believe that at this capital structure the company's debtholders will demand a return of 6% and stockholders will require 11%. The company is forecasting that next year's operating cash flow (depreciation plus profit after tax at 40%) will be $68 million and that investment expenditures will be$30 million. Thereafter, operating cash flows and investment expenditures are forecast to grow by 4% a year. a. What is the total value of Icarus? b. What is the value of the company's equity?

Geothermal's WACC is 11.4%. Executive Fruit's WACC is 12.3%. Now Executive Fruit is considering an investment in geothermal power production. Should it discount project cash flows at 12.3%? Why or why not?

Micro Spinoffs, Inc., issued 20-year debt a year ago at par value with a coupon rate of 8%, paid annually. Today, the debt is selling at $1,050. If the firm's tax bracket is 35%, what is its after-tax cost of debt?

The total market value of Okefenokee Real Estate Company is $6 million, and the total value of its debt is$4 million. The treasurer estimates that the beta of the stock currently is 1.2 and the expected risk premium on the market is 10%. The Treasury bill rate is 4%. a. What is the required rate of return of Okefenokee stock? b. What is the beta of the company's existing portfolio of assets? The debt is perceived to be virtually risk-free/ c. Estimate the weighted-average cost of capital assuming a tax rate of 40%. d. Estimate the discount rate for an expansion of the company's present business. e. Suppose the company want so diversify into manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is 1.4. What is the required rated return on Okefenokee's new venture? (You should assume that the risky project will not enable the firm to issue any additional debt.)

Free cash flow valuation Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value. The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. The firm's weighted average cost of capital is $11 \%$, and it has $\$ 1,500,000$ of debt at market value and $\$ 400,000$ of preferred stock at its assumed market value. The estimated free cash flows over the next $5$ years, $2013$ through 2017, are given below. Beyond $2017$ to infinity, the firm expects its free cash flow to grow by $3 \%$ annually. Calculate the value of Nabor Industries' entire company by using the free cash flow valuation model.

You are evaluating a project that will require an investment of $10 million that will be depreciated over a period of 7 years. You are concerned that the corporate tax rate will increase during the life of the project. Would such an increase affect the account break-even point? Would it affect the NPV break-even point?

Olympic Sports has two issues of debt outstanding . One is a 9% coupon bond coupons are paid annually. The other bond issue has a maturity of 15 years, with coupons also paid annually, and a coupon rate of 10%. The face value of the issues is $25 million, and the issue sells for 94% of par value. The firm's tax rate is 35%. a. What is the before-tax cost of debt for Olympic? b. What is Olympic's after-tax cost of debt?

Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $100. The materials cost for a standard diamond is$40. The fixed costs incurred each year for factory upkeep and administrative expenses are $200,000. The machinery costs$1 million and is depreciated straight-line over 10 years to a salvage value of zero. a. What is the accounting break-even level of sales in terms of number of diamonds sold?

An auto plant that costs $100 million to build can produce a line of flex-fuel cars. The investment will produce cash flows with a present value of$140 million if the line is successful but only $50 million if it is unsuccessful. You believe that the probability of success is only about 50%. You will learn whether the line is successful immediately after building the plant.
a. Would you build the plant?

A financial analyst has computed both accounting and NPV break-even sales levels for a project using straight-line depreciation over a 6-year period. The project manager wants to know what will happen to these estimates if the firm uses MACRS depreciation instead. The capital investment will be in a 5-year recovery period class under MACRS rules (see Table 9.2). The firm is in a 35% tax bracket. a. What (qualitatively) will happen to the accounting break-even level of sales in the first years of the project? b. What (qualitatively) will happen to NPV break-even level of sales? c. If you were advising the analyst, would the answer to (a) or (b) be important to you? Specifically, would you say that the switch to MACRS makes the project more or less attractive?

Nodebt, Inc., is a firm with all-equity financing. Its equity beta is .80. The treasury bill rate is 4%, and the market risk premium is expected to be 10%. What is Nodebt's asset beta? What is Nodebt's weighted-average cost of capital? The firm is exempt from paying taxes.

Following are several months' rates of return for Tumblehome Canoe Company. Prepare a plot life. What is Tumblehome's beta?

$$\begin{array}{ccc} \underline{\textbf{Month}}&\underline{\textbf{Market Return, \%}}&\underline{\textbf{Tumblehome Return,\%}}\\ 1&0&+1\\ 2&0&-1\\ 3&-1&-2.5\\ 4&-1&-0.5\\ 5&+1&+2\\ 6&+1&+1\\ 7&+2&+4\\ 8&+2&+2\\ 9&-2&-2\\ 10&-2&-4\\ \end{array}$$

Emperor’s Clothes Fashions can invest $5 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years, and expected sales are 6 million jars of makeup a year. Fixed costs are$2 million a year, and variable costs are $1 per jar. The product will be priced at$2 per jar. The plant will be depreciated straight-line over 5 years to a salvage value of zero. The opportunity cost of capital is 10%, and the tax rate is 40%. a. What is project NPV under these base-case assumptions? b. What is NPV if variable costs turn out to be $1.20 per jar? c. What is NPV if fixed costs turn out to be$1.5 per year? d. At what price per jar would protect NPV equal zero?

The common stock of Buildwell Conservation & Construction, Inc., has a beta of .90. The Treasury bill rate is 4%, and the market risks premium is estimated at 8%. BCCI's capital structure is 30% debt, paying a 5% interest rate. and 70% equity. What is BCCI's cost of equity capital? Its WACC? Buildwell pays tax at 40%.