Question1. Sydney Industries, Inc. is considering a new project which costs $30 million. The project will come out after-tax (year-end) cash flows of $8 million for five years. The firm has a debt-to-equity ratio of 0.25. The cost of equity is 12 percent and the cost of debt is 7 percent. The corporate tax rate is 40 percent. It seems that the project has the same risk of the entire firm. Should Sydney undertake the project?
Question2. New World Corp. and Old World Corp. are identical in all respects apart from capital structure. New World's bonds have a market value of $200 million while Old World's bonds have a market value of $500 million. These firms operate in a perfect world where markets are perfectly resourceful and there are no taxes or financial distress/bankruptcy costs. Both firms have 10 million shares outstanding. If the stock price for New World is $120, what do you foresee for the stock price of Old World?
Question3. Buckeye Corp. is currently an all-equity firm with the market value of equity of $100 million. The current expected return on the Buckeye's equity is 25%. Buckeye operates in a world with no taxes. Buckeye is planning on issuing $10 million in debt with an interest rate of 10% and using the cash to repurchase $10 million in shares.
(a) After Buckeye repurchases the stock, what will be expected return on the firm's stock?
(b) After Buckeye repurchases the stock, what will be firm's weighted average cost of capital?