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

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

jeff jeffy answered 2 years ago

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