Question

Caspian Sea Drinks is considering the purchase of a new water filtration system produced by Rube Goldberg Machines. This new equipment, the RGM-7000, will allow Caspian Sea Drinks to expand production. It will cost $13.00 million fully installed and will be fully depreciated over a 15 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $2.99 million per year and increased operating costs of $670,270.00 per year. Caspian Sea Drinks' marginal tax rate is 35.00%. The internal rate of return for the RGM-7000 is _____.

Caspian Sea Drinks' is financed with 65.00% equity and the remainder in debt. They have 10.00-year, semi-annual pay, 5.13% coupon bonds which sell for 98.38% of par. Their stock currently has a market value of $24.34 and Mr. Bensen believes the market estimates that dividends will grow at 3.90% forever. Next year’s dividend is projected to be $2.39. Assuming a marginal tax rate of 24.00%, what is their WACC (weighted average cost of capital)?

Answer 1

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