Question

McCann Catching, Inc. has 3.00 million shares of stock outstanding. The stock currently sells for $12.83 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 $19.00 million, and it is currently priced to yield 10.00%. 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 1.19. The corporate tax rate is 34.00%. The firm is considering a $45.70 million expansion of their production facility. The project has the same risk as the firm overall and will earn $10.00 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

MV of equity=Price of equity*number of shares outstanding

MV of equity=12.83*3000000

=38490000

MV of Bond=Par value*bonds outstanding*%age of par

MV of Bond=1000*19000*0.9

=17100000

MV of firm = MV of Equity + MV of Bond

=38490000+17100000

=55590000

Cost of equity

As per CAPM

Cost of equity = risk-free rate + beta * (Market risk premium)

Cost of equity% = 4 + 1.19 * (8)

Cost of equity% = 13.52

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 10*(1-0.34)

= 6.6

Weight of equity = MV of Equity/MV of firm

Weight of equity = 38490000/55590000

W(E)=0.6924

Weight of debt = MV of Bond/MV of firm

Weight of debt = 17100000/55590000

W(D)=0.3076

WACC=after tax cost of debt*W(D)+cost of equity*W(E)

WACC=6.6*0.3076+13.52*0.6924

WACC% = 11.39

Discount rate	11.390%
Year	0	1	2	3	4	5	6	7
Cash flow stream	-45.7	10	10	10	10	10	10	10
Discounting factor	1.000	1.114	1.241	1.382	1.540	1.715	1.910	2.128
Discounted cash flows project	-45.700	8.977	8.059	7.235	6.496	5.831	5.235	4.700
NPV = Sum of discounted cash flows
NPV Project =	0.83 m
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor