Question

A company wants to rise $181000 in cash for a new printing process. The company secured a long-term loan of $50000, with interest rate 3.1% p.a. The remaining cash is acquired by selling shares to investors, and the investors expect a return of investment (ROI) at 7.9% per year. Assume a corporate tax rate of 35%

1. Determine the weighted average cost of capital. Round your answer to the nearest 0.01%

2. The new printing process requires an initial investment of $67,000 and will generate +$4,500 per year of net cash flow for the next 19 years. The CEO of the company would like to readjust the return of investment (ROI) for their investor so the weighted average cost of capital is the same as the internal rate of return for this project. Determine the return of investment (ROI) per year. Round you answer to the nearest 0.01%.

Answer 1

1		AMOUNT	COST OF FUNDS
	TOTAL FUNDS NEEDED	181,000
	LOAN FUNDS	50,000	3.1%
	SHAREHOLDERS FUNDS	131,000	7.9%
	TAX RATE	35.0%
	TAX ADJUSTED COST OF LOAN FUNDS	2.02%	COST OF LOAN FUNDS*(1-TAX RATE)
	WEIGHTED AVERAGE COST OF CAPITAL	TAX ADJUSTED COST OF DEBT*TOTAL DEBT/TOTAL FUNDS+COST OF EQUITY*TOTAL EQUITY/TOTAL FUNDS
		=2.015%*50000/181000+7.9%*131000/181000
		6.27%
2
YEAR	CASH FLOW
0	(67,000)
1.00	4,500
2.00	4,500
3.00	4,500
4.00	4,500
5.00	4,500
6.00	4,500
7.00	4,500
8.00	4,500
9.00	4,500
10.00	4,500
11.00	4,500
12.00	4,500
13.00	4,500
14.00	4,500
15.00	4,500
16.00	4,500
17.00	4,500
18.00	4,500
19.00	4,500
	TO CALCULATE IRR, THE FORMULA IN EXCEL IS = IRR(RANGE OF CELLS CONTAINING CASH FLOWS)
	HERE THE RAGEN WILL STRAT FROM -67000 AND UPTO LAST CASH FLOW OF 4500
IRR	2.57%