Question

In: Finance

What is a firm's weighted-average cost of capital if the stock has a beta of 2.45,...

What is a firm's weighted-average cost of capital if the stock has a beta of 2.45, Treasury bills yield 5%, and the market portfolio offers an expected return of 14%? In addition to equity, the firm finances 30% of its assets with debt that has a yield to maturity of 9%. The firm is in the 35% marginal tax bracket.

A proposed capital project will cost $20 million and generate $4 million annually in after-tax cash flows for 6 years. The cost of capital for a project of this risk level is 12.2%. What is the project's NPV? Should the project be accepted?

Solutions

Expert Solution

Given,
Beta 2.45
Treasury bill yield 5%
Market return 14%
Weight of debt 0.3
Yield to maturity 9%
Tax rate 35%
Therefore,
After tax cost of debt= Yield to maturity*(1-tax rate)
9*(1-0.35)
5.85%
Required return on equity= Risk free rate+(Market return-Risk free rate)*Beta
5+(14-5)*2.45
27.05%
Weight of equity= (1-0.3)= 0.7
Weighted average cost of capital= Weighted average
(5.85*0.3)+(27.05*0.7)
20.69%
Calculation of NPV
Year Cashflows($) Discounting factor @12.2% PV of cashflows ($)
0 -20000000 1 -20000000
1 4000000 0.891265597 3565062.389
2 4000000 0.794354365 3177417.459
3 4000000 0.707980717 2831922.869
4 4000000 0.630998857 2523995.427
5 4000000 0.562387573 2249550.291
6 4000000 0.501236696 2004946.784
NPV -3647104.783
NPV= Present value of future cashflows discounted at the required rate of return
($3,647,104.783) See table
As NPV is negative, the project should not be accepted.

Related Solutions

What is a firm's weighted-average cost of capital if the stock has a beta of 1.5,...
What is a firm's weighted-average cost of capital if the stock has a beta of 1.5, Treasury bills yield 3%, and the market portfolio offers an expected return of 8%? Debt that has a yield to maturity of 7.5%. The firm is in the 25% marginal tax bracket. The cost of preferred stock is 8%. The following are the market values of 1) debt $8million, 2) preferred stock $6million. The company has 1,500,000 shares and the current market price of...
What is a firm's weighted-average cost of capital if the stock has a beta of 1.45,...
What is a firm's weighted-average cost of capital if the stock has a beta of 1.45, Treasury bills yield 5%, and the market portfolio offers an expected return of 14%? In addition to equity, the firm finances 30% of its assets with debt that has a yield to maturity of 9%. The firm is in the 35% marginal tax bracket.
What is a firm's weighted-average cost of capital if the stock has a beta of 1.1,...
What is a firm's weighted-average cost of capital if the stock has a beta of 1.1, Treasury bills yield 4%, and the market portfolio offers an expected return of 16%? In addition to equity, the firm finances 70% of its assets with debt that has a yield to maturity of 10%. The firm is in the 35% marginal tax bracket.
What is a firm's weighted-average cost of capital if the stock has a beta of 1.1,...
What is a firm's weighted-average cost of capital if the stock has a beta of 1.1, Treasury bills yield 4%, and the market portfolio offers an expected return of 16%? In addition to equity, the firm finances 70% of its assets with debt that has a yield to maturity of 10%. The firm is in the 35% marginal tax bracket.
True or False: A Firm's capital structure has no impact on the firm's weighted average cost...
True or False: A Firm's capital structure has no impact on the firm's weighted average cost of capital
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings...
The firm's weighted average cost of capital is 13% and it has $2550000 of debt at...
The firm's weighted average cost of capital is 13% and it has $2550000 of debt at market value and $510000 of preferred stock in terms of market value. The estimated free cash flow over next 5 years are in the table. Beyond 2024 to infinity, the firm expects its free cash flow to grow by 6% annually. 2020 - $250000, 2021 - $310000, 2022 - $380000, 2023 - $430000, 2024 - $470000 a. Estimate the value of the entire company...
What is the weighted average cost of capital of the company? How has the company's stock...
What is the weighted average cost of capital of the company? How has the company's stock been performing in the last 5 years? What is the annual cash dividend yield of the common stock? How would you assess the overall risk structure of the company in terms of its operating risks and financial risk (debt-to-capitalization ratio)? Would you invest in this company? Why or why not? i choose apple inc company please provide quick answer
The firm's weighted-average cost of capital is likely to _________________ if debt financing is used to...
The firm's weighted-average cost of capital is likely to _________________ if debt financing is used to excess. Select one: A. increase B. decrease C. remain unchanged D. collapse
What is Weighted Average Cost of Capital?
What is Weighted Average Cost of Capital?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT