Ellesmere Glass Works Inc. (EGWI) is considering the following two machines for manufacturing mirrors: SS Model DD Model
Posted: Sat Feb 26, 2022 9:06 am
Ellesmere Glass Works Inc. (EGWI) is considering the following
two machines for
manufacturing mirrors:
SS Model DD Model
Expected annual before tax cost savings $40,000 $35,000
Economic Life 10years 5 years
Price of Machine $100,000 $40,000
Both machines will be worthless at the end of their economic
life.
The machines have a CCA rate of 30%. EGWI is subject to a corporate
tax rate of 40%. EGWI
has obtained the following information for its analysis of various
investments and financial
proposals:
Expected Covariance with
Asset Return Variance Market Returns
Risk free asset 0.03
Market Portfolio 0.08 0.02
EGWI Common Stock 0.028
EGWI, an all equity firm, has a market value of $2,000,000
a. What is EGWI’s cost of capital?
b. Which of the two machines should EGWI purchase?
c. EGWI is considering the sale of $1,000,000 of 5% perpetual bonds
and uses the proceeds to
repurchase EGWI stock. If this plan is adopted:
1. What is the value of the firm with the new project
included?
2. What is the value of the firm’s equity with the new project
included?
two machines for
manufacturing mirrors:
SS Model DD Model
Expected annual before tax cost savings $40,000 $35,000
Economic Life 10years 5 years
Price of Machine $100,000 $40,000
Both machines will be worthless at the end of their economic
life.
The machines have a CCA rate of 30%. EGWI is subject to a corporate
tax rate of 40%. EGWI
has obtained the following information for its analysis of various
investments and financial
proposals:
Expected Covariance with
Asset Return Variance Market Returns
Risk free asset 0.03
Market Portfolio 0.08 0.02
EGWI Common Stock 0.028
EGWI, an all equity firm, has a market value of $2,000,000
a. What is EGWI’s cost of capital?
b. Which of the two machines should EGWI purchase?
c. EGWI is considering the sale of $1,000,000 of 5% perpetual bonds
and uses the proceeds to
repurchase EGWI stock. If this plan is adopted:
1. What is the value of the firm with the new project
included?
2. What is the value of the firm’s equity with the new project
included?