Question
In: Finance
Ramblin Wreck is a firm specializing in engineering components. The firm is publicly traded and is...
Ramblin Wreck is a firm specializing in engineering components. The firm is publicly traded and is considering the following project:
The project will last 5.00 years with an annual cash flow of $40.00 million. The project will require an initial investment of $140.00 million
The firm must determine the cost of capital to evaluate the project. (The project is within the firm’s normal activities)
Ramblin Wreck, Inc. Financial Data:
| STOCK DATA: | BOND DATA: | ||
|---|---|---|---|
| Current Price Per Share | $29.00 | Current Price Per Bond | $938.00 |
| # of Shares | 2.00 million | # of bonds | 20,000.00 |
| Book Value | $50 million | Annual Coupon Rate | 8.00% |
| Face Value Per Bond | $1,000 | ||
| Maturity | 10 years |
The risk free rate in the economy is currently 2.00%, while
investors have a market risk premium of 7.00%. Ramblin Wreck, Inc.
has a beta of 1.49. The tax rate is 37.00%.
What is the NPV of the project? (express in millions, so 1000000 would be 1.00)
Submit
Answer format: Currency: Round to: 2 decimal places.
Solutions
Expert Solution
| Cost of capital would be weighted average cost of capital | ||||
| WACC | Weight of equity*Cost of equity + (Weight of debt*Cost of debt*(1-tax rate)) | |||
| Cost of equity using CAPM formula | ||||
| Cost of equity (Ke) | Rf + Beta*(Rm-Rf) | |||
| Risk free rate is Rf | ||||
| Market return is Rm | ||||
| Rm-Rf is risk premium | ||||
| Cost of equity (Ke) | 2% + (1.49*7%) | |||
| Cost of equity (Ke) | 12.43% | |||
| Assuming coupon are paid annually as nothing is mentioned we calculate yield to maturity | ||||
| Face value (FV) | $1,000 | |||
| Present value (PV) | $938 | |||
| No of payments (NPER) | 10 | |||
| Coupon amount (PMT) | $80 | |||
| Yield to maturity | 8.96% | RATE(10,-80,938,-1000) | ||
| After tax cost of debt | 5.65% | 8.96%*(1-0.37) | ||
| Market value of shares | 2000000*29 | |||
| Market value of shares | $58,000,000 | |||
| Market value of debt | 938*20000 | |||
| Market value of debt | $18,760,000 | |||
| Total market value of equity and debt | $76,760,000 | |||
| Weight of equity | 75.56% | 58000000/76760000 | ||
| Weight of debt | 24.44% | 18760000/76760000 | ||
| WACC | (75.56%*12.43%)+(24.44%*5.65%) | |||
| WACC | 10.77% | |||
| Calculate net present value | ||||
| Year | Cash flow | Discount factor @ 10.77% | Present value | |
| 0 | -$140.00 | 1.0000 | -$140.00 | |
| 1 | $40.00 | 0.9028 | $36.11 | |
| 2 | $40.00 | 0.8150 | $32.60 | |
| 3 | $40.00 | 0.7358 | $29.43 | |
| 4 | $40.00 | 0.6642 | $26.57 | |
| 5 | $40.00 | 0.5996 | $23.99 | |
| Net present value | $8.70 | |||
| Thus, net present value is $8.70 million | ||||
jeff jeffy answered 3 years agoRelated Solutions
Ramblin Wreck is a firm specializing in engineering components. The firm is publicly traded and is...
Ramblin Wreck is a firm specializing in engineering components.
The firm is publicly traded and is considering the following
project: The project will last 5.00 years with an annual cash flow
of $40.00 million. The project will require an initial investment
of $140.00 million The firm must determine the cost of capital to
evaluate the project. (The project is within the firm’s normal
activities) Ramblin Wreck, Inc. Financial Data: STOCK DATA: BOND
DATA: Current Price Per Share $30.00 Current Price...
Ramblin Wreck is a firm specializing in engineering components. The firm is publicly traded and is...
Ramblin Wreck is a firm specializing in engineering components.
The firm is publicly traded and is considering the following
project:
The project will last 5.00 years with an annual cash flow of
$40.00 million. The project will require an initial investment of
$140.00 million
The firm must determine the cost of capital to evaluate the
project. (The project is within the firm’s normal activities)
Ramblin Wreck, Inc. Financial Data:
STOCK DATA:
BOND DATA:
Current Price Per Share
$29.00
Current Price...
Ramblin Wreck is a firm specializing in engineering components. The firm is publicly traded and is...
Ramblin Wreck is a firm specializing in engineering components.
The firm is publicly traded and is considering the following
project:
The project will last 5.00 years with an annual cash flow of
$40.00 million. The project will require an initial investment of
$140.00 million
The firm must determine the cost of capital to evaluate the
project. (The project is within the firm’s normal activities)
Ramblin Wreck, Inc. Financial Data:
STOCK DATA:
BOND DATA:
Current Price Per Share
$28.00
Current Price...
Ramblin Wreck is a firm specializing in engineering components. The firm is publicly traded and is...
Ramblin Wreck is a firm specializing in engineering components.
The firm is publicly traded and is considering the following
project:
The project will last 5.00 years with an annual cash flow of
$40.00 million. The project will require an initial investment of
$140.00 million
The firm must determine the cost of capital to evaluate the
project. (The project is within the firm’s normal activities)
Ramblin Wreck, Inc. Financial Data:
STOCK DATA:
BOND DATA:
Current Price Per Share
$29.00
Current Price...
Ramblin Wreck is a firm specializing in engineering components. The firm is publicly traded and is...
Ramblin Wreck is a firm specializing in engineering components.
The firm is publicly traded and is considering the following
project:
The project will last 5.00 years with an annual cash flow of
$40.00 million. The project will require an initial investment of
$140.00 million
The firm must determine the cost of capital to evaluate the
project. (The project is within the firm’s normal activities)
Ramblin Wreck, Inc. Financial Data:
STOCK DATA:
BOND DATA:
Current Price Per Share
$28.00
Current Price...
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