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Algoma Incorporated has a capital structure which is based on 35 % debt, 15 % preferred stock, and 50 % common stock.

Algoma Incorporated has a capital structure which is based on 35 % debt, 15 % preferred stock, and 50 % common stock. The after-tax cost of debt is 7 %, the cost of preferred is 8 %, and the cost of common stock is 10%. The company is considering a project that is equally as risky as the overall firm. This project has initial costs of $140,000 and cash inflows of $90,000 a year for two years. What is the projected net present value of this project?

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Expert Solution

Here,

Weight of Debt = 35%

Weight of Preferred Stock = 15%

Weight of Common Stock = 50%

After-Tax Cost of Debt = 7%

Cost of Preferred Stock = 8%

Cost of Common Stock = 10%

 

Using the Formula of Weighted Average Cost of Capital

 

Calculations are made as follows:

 

Projected Net Present Value of this project is $19,074.82.

 

Formulae:

Projected Net Present Value of this project is $19,074.82.

Umair answered 1 year ago
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