Question

16. Taylor Technologies has a target capital structure that consists of 40% debt and 60% equity. The equity will be financed with retained earnings. The company’s bonds have a yield to maturity of 10%. The company’s stock has a beta = 1.1. The risk-free rate is 6%, the market risk premium is 5%, and the tax rate is 30%. The company is considering a project with the following cash flows:

Project A

Year Cash Flow

0 -$50,000

1 35,000

2 43,000

3 60,000

4 -40,000

What is the project’s MIRR?

Answer 1

1 calculation of cost of capital :

1. COST OF DEBT (KD) = YTM OF BOND = 10% (GIVEN)

POST TAX COST OF DEBT(KD) = 10*0.7 = 7%

2. COST OF EQUITY GIVEN AS PER CAPM :

RE = RF + (RM-RF) BETA

RE= 6+(5)*1.1

   RE = 11.5 %

1.PARTICLAURS	2.RATE	3.WEIGHTS	AMOUNT (2*3)
KD	7%	0.40	2.8
RE	11.5	0.60	6.9
TOTAL COST OF CAPITAL (KC)			9.7%

CALCULATION OF OUTFLOWS

YEAR	OUTFLOW	PRESENT VALUE @7%(COST OF FINANCE/KD)	AMOUNT
1	50000	1	50000
4	40000	0.762	30480
TOTAL OUTFLOW PV NEGATIVE CASH FLOWS DISCOUNTED AT FINANCE COST			80480

CASH INFLOW

YEAR	INFLOW	FUTURE VALUE	AMOUNT
1	35000	35000*1.097*1.097*1.097	46204.88
2	43000	43000*1.097*1.097	51746.58
3	60000	60000*1.097	65820
TOTAL			163771.46

MIRR=   

MIRR= 19.43%