Question

McCann Catching, Inc. has 3.00 million shares of stock outstanding. The stock currently sells for $12.75 per share. The firm’s debt is publicly traded and was recently quoted at 90.00% of face value. It has a total face value of $12.00 million, and it is currently priced to yield 8.00%. The risk free rate is 4.00% and the market risk premium is 8.00%. You’ve estimated that the firm has a beta of 1.37. The corporate tax rate is 34.00%.

The firm is considering a $41.72 million expansion of their production facility. The project has the same risk as the firm overall and will earn $12.00 million per year for 7.00 years.

What is the cost of equity?

What is the percentage of equity used by McCann Catching, Inc.?

What is the WACC for McCann Catching, Inc.?

What is the NPV of the expansion? (answer in terms of millions, so 1,000,000 would be 1.0000)

Answer 1

McCann Catching, Inc. has 3.00 million shares of stock outstanding.

tock currently sells for $12.75 per share.

So the market value of equity = Price per share * no of shares outstanding

= 12.75 * 3000000

= 38250000

1) Cost of equity according to CAPM formula = risk free rate + beta * market risk premium

The risk free rate is 4.00%

the firm has a beta of 1.37

the market risk premium is 8.00%

Cost of equity = 4 + 1.37 * 8 = 14.96 %

2)

The firm’s debt is publicly traded and was recently quoted at 90.00% of face value. It has a total face value of $12.00 million

So the market value of debt = 12000000 * 90% = 10800000

the market value of equity= 38250000

Total value = 10800000 + 38250000 = 49050000

Weight of equity used by MCcann = 38250000/ 49050000 = 0.77981

So the percentage of equity used by MCcann = 77.98%

3)

Weight of debt used by MCcann = 10800000 / 49050000 = 0.2202 or 22.02%

Cost of debt = Ytm = 8%

WACC for McCann Catching, Inc. = weight of debt * cost of debt * ( 1 -tax) + weight of equity* cost of equity

= 0.2202 * 0.08 * ( 1-0.34) + 0.7798 * 0.1496

= 0.1283 or 12.83%

4)

The firm is considering a $41.72 million expansion of their production facility. The project has the same risk as the firm overall and will earn $12.00 million per year for 7.00 years

Initial outflow at year 0 = 41720000

Inflow from year 1-7 = 12000000

Cost of capital = wacc = 12.83%

The NPV is calculated as per the table shown below :

Year	Cash Flow(CF)	PV factor	CF* Pv factor
0	-41720000	1	-41720000
1	12000000	0.886	10635469.29
2	12000000	0.786	9426100.585
3	12000000	0.696	8354250.275
4	12000000	0.617	7404281.02
5	12000000	0.547	6562333.617
6	12000000	0.485	5816124.804
7	12000000	0.430	5154768.062
Total	11633327.65

The required NPV of the expansion = 11633328 or 11.63 million $