Question

Can you please right a short executive summary.

these are the information:

	Value	Weight	Cost
Market value of debt	226,800,000	0.2740	5.79%
Market value of equity	564,400,000	0..6819	11.20%
Market value of preferred stock	36,450,000	0.0440	5.56%
Sum	827,650,000

The cost of current capital is 8.91%.

the weighted average cost of capital is 9.42%

Cash flow for the year

Cost of plant (adjusted with flotation cost) = $39,708,092

Scrap value = 5 years

Depreciation = 39,708,092-5,100,0006,921,618.4

Income statement:

Sales price	$11,450
Less: variable cost	9,500
Contribution p.u	1,950
(x)no. of machines	15,300
Total contribution	29,835,000
Less: Depreciation	6,921,618.4
Less: Fixed cost	6,700,000
Profit before tax	16,213,381.6
Less: tax 35%	575,674,683.56
Profit after tax	10,538,698.04

Weighted average cost of capital including flotation cost is 15.87%

NPV = 69.1

IRR = 34%

Answer 1

Given the weighted average cost of capital is 9.42% whereas the weighted average cost of capital including the flotation cost for the project is 15.87%, that shows that the cost for the project has significantly gone up in terms of cost of raising money. Normally the cost of raising money through equity is high because of the risk component attached with the equity component and the flotation cost which has to be paid to the bankers, attorneys and underwriters for issuing equity. The market value weight of equity is 68.19% and because of the WACC seems to be 9.42%. May be one way to reduce the cost little more would be issue preferred stock and increase the weight of preferred stock. This logic can be applied and tried if the total cost of capital is reduced from 15.87%.

The initial outflow of the project is quite high around 39 Million but the project seems to be a good project which is not very long. The time period of the project is 5 years and the NPV is also positive. Assuming the NPV is given in Millions, then the project is adding 69.1 Million to the firm value which is quite good. The internal rate of return for the project is also very high, it actually is more than twice the weighted cost of capital for the project which is quite assuring. Although the contribution margin of the project is not very high (around 17%) the project seems to be operating at large scale so the total contribution margin would high and the per unit fixed and other indirect expenses would be reduced.