Raymond Mining Corporation has 8.5 million shares of common stock outstanding and 135,000 quarterly bonds outstanding...

Raymond Mining Corporation has 8.5 million shares of common stock outstanding and 135,000 quarterly bonds outstanding with face value $1000 and coupon rate of 7.5%. The common stock currently sells for $34 per share and has a beta of 1.25, and the bonds have 15 years to maturity and sell for 114 percent of the face value. The market risk premium is 7.5 percent, T-bills are yielding 4 percent (thus risk free rate is 4%), and Raymond Mining tax rate is 35%. Raymond Mining is considering an investment which will cost $2,590,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is $580,000. This inflow will increase to $1,500,000 and then $2,000,000 for the following years before ceasing permanently (thus the project has in total 4 years).

What is the cost of debt for this project (before tax)?

What is the cost of equity?

What is the weight of debt in the WACC calculation?

What is the project's WACC?

What is the Internal Rate of Return for the above project?

Assuming that in the previous calculation you would find WACC to be 10% and IRR to be 20%, would you accept this project?

Assuming a WACC of 10%, what is the Discounted Payback Period for this project?

Assuming a WACC of 10%, what is the Profitability Index for this project?

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Expert Solution

jeff jeffy answered 1 year ago

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