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Question 18-22 Droz's Hiking Gear, Inc. has found that its common equity capital shares have a...

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18-22

Droz's Hiking Gear, Inc. has found that its common equity capital shares have a beta equal to 1.5 while the risk-free return is 8 percent and the expected return on the market is 14 percent. It has 7-year semiannual maturity bonds outstanding with a price of $767.03 that have a coupon rate of 7 percent. The firm is financed with $140,000,000 of common shares (market value) and $60,000,000 of debt. Droz's, is subject to a 35 percent marginal tax rate. The management of Droz’s, is considering an expansion project that costs $1.2 million. The project will produce a cash inflow of $600,000 for 5 years.

What is the fraction of each securities? (Round to the two decimal places.)

A) x d e b t = 0.3 , x c s = 0.7
B) x d e b t = 0.7 , x c s = 0.3
C) x d e b t = 0.4 , x c s = 0.6
D)

What is the pre-tax cost of debt? (Round to the nearest percent.)

A) 6%
B) 8%
C) 12%
D) 16%

What is the cost of common equity? (Round to the nearest percent.)

A) 13%
B) 15%
C) 17%
D) 19%

What is the WACC? (Round to the two decimal places.)

A) 17.36%
B) 16.48%
C) 15.64%
D) 14.24%

What is the NPV of this project and should Droz’s Hiking Gear, Inc. invest in this project? (Round to the nearest dollar.)

A) -$53,113, No
B) $946,887, Yes
C) $848,023, Yes
D) -$45,167, No

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