Question
In: Finance
If you earn the WACC on a project, (IRR = WACC) or NPV = 0, what...
- If you earn the WACC on a project, (IRR = WACC) or NPV = 0, what have you accomplished for your shareholders?
1A. A semiannual bond pays a 4.5 % coupon for the next 27 years. If investors want a 7.3% return, what are they willing to pay for the bond?
Solutions
Expert Solution
1)
If WACC is earned on the project i.e. IRR=WACC, then the Project was Indifferent. There is No Gain or No Loss by undertaking the Project. Therefore, Nothing is accomplished for shareholders.
1A)
Semi Annual Coupon = Face Value*Coupon Rate/2 = 1000*4.5%/2 = 22.5
Semi Annual Return = 0.073/2 = 0.0365
| Period | Cash Flow | Discounting
Factor [1/(1.0365^year)] |
PV of Cash
Flows (cash flows*discounting factor) |
| 1 | 22.5 | 0.964785335 | 21.70767004 |
| 2 | 22.5 | 0.930810743 | 20.94324172 |
| 3 | 22.5 | 0.898032555 | 20.20573248 |
| 4 | 22.5 | 0.86640864 | 19.49419439 |
| 5 | 22.5 | 0.83589835 | 18.80771287 |
| 6 | 22.5 | 0.80646247 | 18.14540557 |
| 7 | 22.5 | 0.778063164 | 17.50642119 |
| 8 | 22.5 | 0.750663931 | 16.88993844 |
| 9 | 22.5 | 0.724229552 | 16.29516492 |
| 10 | 22.5 | 0.698726051 | 15.72133615 |
| 11 | 22.5 | 0.674120648 | 15.16771457 |
| 12 | 22.5 | 0.650381715 | 14.63358859 |
| 13 | 22.5 | 0.627478741 | 14.11827167 |
| 14 | 22.5 | 0.605382287 | 13.62110147 |
| 15 | 22.5 | 0.584063953 | 13.14143894 |
| 16 | 22.5 | 0.563496337 | 12.67866758 |
| 17 | 22.5 | 0.543653002 | 12.23219255 |
| 18 | 22.5 | 0.524508444 | 11.80143999 |
| 19 | 22.5 | 0.506038055 | 11.38585624 |
| 20 | 22.5 | 0.488218095 | 10.98490713 |
| 21 | 22.5 | 0.471025658 | 10.59807731 |
| 22 | 22.5 | 0.454438647 | 10.22486957 |
| 23 | 22.5 | 0.438435743 | 9.864804213 |
| 24 | 22.5 | 0.422996375 | 9.51741844 |
| 25 | 22.5 | 0.4081007 | 9.18226574 |
| 26 | 22.5 | 0.39372957 | 8.858915331 |
| 27 | 22.5 | 0.379864515 | 8.546951598 |
| 28 | 22.5 | 0.366487714 | 8.245973563 |
| 29 | 22.5 | 0.353581972 | 7.955594368 |
| 30 | 22.5 | 0.341130701 | 7.67544078 |
| 31 | 22.5 | 0.329117898 | 7.405152706 |
| 32 | 22.5 | 0.317528122 | 7.144382736 |
| 33 | 22.5 | 0.306346475 | 6.892795693 |
| 34 | 22.5 | 0.295558587 | 6.650068204 |
| 35 | 22.5 | 0.28515059 | 6.415888282 |
| 36 | 22.5 | 0.275109108 | 6.189954927 |
| 37 | 22.5 | 0.265421233 | 5.971977739 |
| 38 | 22.5 | 0.256074513 | 5.761676545 |
| 39 | 22.5 | 0.247056935 | 5.558781037 |
| 40 | 22.5 | 0.238356908 | 5.363030427 |
| 41 | 22.5 | 0.229963249 | 5.174173108 |
| 42 | 22.5 | 0.221865171 | 4.991966337 |
| 43 | 22.5 | 0.214052263 | 4.816175916 |
| 44 | 22.5 | 0.206514484 | 4.646575896 |
| 45 | 22.5 | 0.199242146 | 4.482948284 |
| 46 | 22.5 | 0.192225901 | 4.325082763 |
| 47 | 22.5 | 0.18545673 | 4.172776423 |
| 48 | 22.5 | 0.178925933 | 4.025833501 |
| 49 | 22.5 | 0.172625117 | 3.884065124 |
| 50 | 22.5 | 0.166546181 | 3.747289072 |
| 51 | 22.5 | 0.160681313 | 3.615329544 |
| 52 | 22.5 | 0.155022974 | 3.488016926 |
| 53 | 22.5 | 0.149563892 | 3.36518758 |
| 54 | 22.5 | 0.14429705 | 3.246683627 |
| 54 | 1000 | 0.14429705 | 144.2970501 |
| Price
of the Bond = Sum of PVs |
671.7851699 |
Therefore, They are willing to pay 671.785/1000 = 67.1785% of Face Value
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