In: Accounting
The Two Dollar Store has a cost of equity of 10.9 percent, the YTM on the company's bonds is 5.6 percent, and the tax rate is 40 percent. If the company's debt–equity ratio is .45, what is the weighted average cost of capital?
a-8.56%
b- 9.13%
c- 5.70%
d- 8.21%
e- 7.53% (NOT CORRECT)
Dyrdek Enterprises has equity with a market value of $12.7 million and the market value of debt is $4.50 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 2.2 percent. The new project will cost $2.58 million today and provide annual cash flows of $671,000 for the next 6 years. The company's cost of equity is 11.83 percent and the pretax cost of debt is 5.07 percent. The tax rate is 35 percent. What is the project's NPV?
a- $192,088 .(NOT CORRECT)
b- $377,207
c- $579,510
d- $194,678
e- $158,451
Answer 1)
Cost (%) | Weight | Product | |
Equity | 10.90 | 1.00 | 10.90 |
Debt | 3.36 | 0.45 | 1.51 |
Total | 1.45 | 12.41 |
Weighted Average Cost of Capital = 12.41 / 1.45 = 8.56% (Option a)
Answer 2)
Cost (%) | Weight | Product | |
Equity | 11.83 | 12.70 | 150.24 |
Debt | 3.30 | 4.50 | 14.83 |
Total | 17.20 | 165.07 |
Weighted Average Cost of Capital = 165.07 / 17.20 = 9.5971%
Revised Cost of Capital for new project = 9.597 + 2.20 = 11.7971%
Year | Annual Cash Infow | PVIFA | PV of Cash Inflows |
1 to 6 | 671000 | 4.135138 | 2774678 |
NPV = 2774678 - 2580000 = 194678 (Correct Option - d)