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A firm is deciding on a new project. Use the following information for the project evaluation...

A firm is deciding on a new project. Use the following information for the project evaluation and analysis:

        - The initial costs are $900,000 for fixed assets. The fixed assets will be depreciated straight line to a zero book value over the 3-year life of the project. The fixed assets have an estimated salvage value of $60,000 at the end of the project.

        - The project also requires an additional $200,000 for net working capital. All of the net working capital will be recouped at the end of the 3 years.

        - The project is expected to generate sales of $2,000,000 (2,000 units at a sales price of $1,000/unit), incur total costs of $1,500,000 per year (comprised of variable cost of $500 per unit and fixed costs of $500,000).

        - The firm’s marginal tax rate is 40 percent.

- The company has 50,000 shares of common stock outstanding at a market price of $25 a share. The stocks have a beta of 1.5. The risk free rate is 1%, and the market risk premium is 10%.

        - There are 1,000 bonds outstanding which mature in 13 years, have a face value per bond of $1,000, and are currently quoted at $1,250 each. The bonds have a coupon rate of 10 percent.

        - The target capital structure is 50% debt and 50% equity.

A) What is the capital structure weight of equity (wE)?

      B) What is the capital structure weight of debt (wD)

      C) What is the cost of Debt (RD)?

      D) What is the cost of Equity (RE)?

     

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