Question

a manufacturing company has 40,000 bonds outstanding with a 10% annual coupon rate, 11 years to maturity, a $4000 face value, and a $4,1000 market price. yield to maturity (YTM) is 7.48%. the company's 800,000 shares of common stock sell for $55 per share and have a beta of 1.8. the risk-free rate is 4%,and the market return is 15%. assuming a 40% tax rate, what is the company;s WACC?

Management has decided to add an additional 2.0 percent to the company's overall cost of capital when evaluating a production expansion project. the project requires a capital investment of outlay of $92,000 and projected cash inflows of $47,000 in year one ,$58,000 in year two, and $60,000 in year three. the firm has a flotation cost of debt of 10 percent and a flotation cost of equity of 13.5 percent. what is the projected net present value of the project ?

Answer 1

ANS= A) WACC= 9.77% , B) Net present value = 39,499.377

A) WACC =wieght of debt * [cost of debt* (1- tax rate)]+ weight of equity * cost of equity , Cost of equity = Risk free rate (Rf)+ beta * ( market return - Rf).

Total debt = $4,100 * 40,000 = 164,000,000, Total equity = 55 * 800,000 =44,000,000, Total capital = 44,000,000 + 64,000,000 = 208,000,000 , Cost of equity = 0.04 + 1.8* ( 0.15 - 0.04) = 23.80%. Cost of debt = 10%.

# WACC= {(164,000,000 / 208,000,000) *0.10* (1- 0.40) } + { (44,000,000 / 208,000,000) * 0.2380} = 9.77%.

B) Net present value of project = Present value of all cash inflow - P.V of cash outflow.

For undertake project management decide to add 2% to overall cost of capital (WACC) . New WACC = 11.77%

Present value of cash inflow= cashflow / (1+ WACC) ^ n . N= number of year.

PV of all cash inflow= 47,000 /(1+ 0.1177)^1 + 58,000 / (1.1177)^2 + 60,000 / (1.1177) ^3 = $131,449.377.

Net present value = 131,449.377 - 92,000 = $39,499.377