Question

Neon Corporation’s stock returns have a covariance with the market portfolio of .0345. The standard deviation of the returns on the market portfolio is 25 percent, and the expected market risk premium is 8.8 percent. The company has bonds outstanding with a total market value of $55.13 million and a yield to maturity of 7.8 percent. The company also has 4.63 million shares of common stock outstanding, each selling for $23. The company’s CEO considers the current debt–equity ratio optimal. The corporate tax rate is 34 percent, and Treasury bills currently yield 4.7 percent. The company is considering the purchase of additional equipment that would cost $42.13 million. The expected unlevered cash flows from the equipment are $11.93 million per year for five years. Purchasing the equipment will not change the risk level of the company.

  

Calculate the NPV of the project. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV

$

Answer 1

Assumptions:

• No Depreciation effect has been taken into consideration while calculating the cash flows
• In the absence of information regarding coupon rate and face value of bonds issued, Yield to Maturity is taken as Coupon rate and the market value is assumed as par value of the bond.

The NPV of the project is ($20,714,262) is negative and hence it is not advisable to pursue the same.