In the continuing value formula used in the terminal/mature/constant growth period, which of the three key variables is in the middle? Weighted Average Cost of Capital Growth rate (at maturity) Return on Invested Capital
Added by Jeffrey M.
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These are typically the Weighted Average Cost of Capital (WACC), the Growth Rate (at maturity), and the Return on Invested Capital (ROIC). Show more…
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Caters Inc. is considering an investment of $40 million in plant and machinery. This is expected to produce sales of $20 million in year 1, $26 million in year 2, and $30 million in year 3. Subsequent sales are expected to increase by 10% each year for the remaining 5 years. The plant and machinery will be scrapped after 8 years with a salvage value of $10 million. The property and machinery belong to the 7-year recovery period class for depreciation purposes (MACRS). Cost of goods sold (COGS) is expected to be $8 million in year 1, $14 million in year 2, and to increase at 10% each year for the remaining 6 years. Fixed operating expenses are $1,000,000 per year. Year-end net working capital (NWC) is given below. Caters Inc. has a corporate tax rate of 40%. k = 000s 0: 500k 1: 600k 2: 700k 3: 800k 4: 900k 5: 800k 6: 700k 7: 600k 8: 0 a) Carters Inc. has a target debt-equity ratio of .60 (or 3/5). Caters plans to use the following types of financing: - Bonds: The firm can estimate the cost of debt using their existing bonds. The bonds have 8-years remaining and have a face value of $1,000. The bonds have a coupon rate of 5.5% and coupons are paid annually. The current bond price is $867. - Retained Earnings (Internal Equity): They retain 40% of earnings and have a current EPS of $6.75 per share. The ROE is 20% and the current share price is $45. (Note: SGR=Retention Rate*ROE) Find the weighted average cost of capital (WACC). Carry your work out to 2 decimal places (so xx.xx%) b) Calculate the net present value (NPV) with the WACC. c) Should they invest? Why or why not?
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