D. 559,180 shares
E. 562,400 shares
Hanover Tech is currently an all equity firm that has 320,000 shares of stock
outstanding with a market price of $19 a share. The current cost of equity is 15.4
percent and the tax rate is 36 percent. The firm is considering adding $1.2 million of
debt with a coupon rate of 8 percent to its capital structure. The debt will be sold at par
value. What is the levered value of the equity?
A. $5.209 million
B. $5.312 million
C. $5.436 million
D. $6.512 million
E. $6.708 million
Cantor's has been busy analyzing a new product. Thus far, management has determined
that an OCF of $218,200 will result in a zero net present value for the project, which is
the minimum requirement for project acceptance. The fixed costs are $329,000 and the
contribution margin per unit is $216.40. The company feels that it can realistically
capture 2.5 percent of the 110,000 unit market for this product. The tax rate is 34
percent and the required rate of return is 11 percent. Should the company develop the
new product? Why or why not?
A. Yes; The project's expected IRR exceeds the required rate of return.
B. Yes; The expected level of sales exceeds the required level of production.
C. No; The required level of production exceeds the expected level of sales.
D. No; The IRR is less than the required rate of return.
E. No; The project will never payback on a discounted basis.