Barley Inc. just hired you as their financial analyst. The company is thinking of expanding into a new product line that requires a new piece of equipment and wants your opinion. Here's the info:
Average return in the stock market is currently 7%. The risk free rate is 2%. Barley Inc. has a current beta of 1.25.
Barley Inc. has one bond currently outstanding that is selling for a premium, at 110. The bonds have a 5% annual coupon rate and pay interest annually. Assume $1,000 par value and 10 yea remaining to maturity.
Barley Inc. must maintain at least a 60% equity to total asset ratio or face default on the bonds. The company has a 25% tax rate.
The project has an initial cost of $100,000. The equipment will have no salvage value at the en of the project in 5 years.
You did a pro-forma income statement and came up with the following net income figures:
Year 1=5,000
Year 2=15,000
Year 3=25,000
Year 4=22,000
Year 5=26,000
What is the depreciation each year?
a. $50,000
b. $25,000
c. $100,000
d. $200,000
e. None of the above.
Mini-Comprehensive Problem
Barley Inc. just hired you as their financial analyst. The company is thinking of expanding into a new product line that requires a new piece of equipment and wants your opinion. Here's the info:
Average return in the stock market is currently 7%. The risk free rate is 2%. Barley Inc. has a current beta of 1.25 Barley Inc. has one bond currently outstanding that is selling for a premium, at 110. The bonds have a 5% annual coupon rate and pay interest annually. Assume $1,000 par value and 10 yea remaining to maturity Barley Inc. must maintain at least a 60% equity to total asset ratio or face default on the bonds. The company has a 25% tax rate. The project has an initial cost of $100,000. The equipment will have no salvage value at the en of the project in 5 years. You did a pro-forma income statement and came up with the following net income figures: Year1=5,000 Year2=15,000 o Year3=25,000 Year4=22,000 o Year 5=26,000
15.
What is the depreciation each year? a.$50,000 b.$25,000 c.$100,000 d. $200,000 e.None of the above