1) Firms X & Y sell Bison Hot Dogs. Firm Y’s capital structure is different – it has $ 10 million; 5% coupon bonds. EBIT for firms is $ 2 million. Cost of equity for A is 10%.
a) In a Modigliani and Miller (MM) world – estimate the value for A & B.
b) find out what shareholders need as the return for A & B.
2) Gold Inc labs recover gold from printed circuit boards. It has developed new equipment for reason. The data is given below.
(i) Equipment costs= $250,000
(ii) It will cost= $200,000 per year to run
(iii) It has an economic life of 5 years and is depreciated using straight-line method
(iv) It will recover 300 ounces of gold per year
(v) The present price of gold= $600 per ounce and it expected to increase at a rate 4% per year for the foreseeable future
(vi) The tax rate is 30%
(vii) The cost of capital is 8%. Determine NPV of the equipment?