In: Finance

# (15) Crow Corporation is planning a $200 million expansion to be financed with debt, preferred stock,... 1. (15) Crow Corporation is planning a$200 million expansion to be financed with debt, preferred stock, and common stock. Their target capital structure includes 20% debt and 5% preferred stock. They will raise the rest of the funds by retained earnings. The tax rate is 25%.

Bonds: Crow Corporation has bonds with 6 years to maturity and a face value of $1000. The coupon rate is 7.8% and coupons are paid semiannually. The bonds trade at$990 per bond. The (before-tax) cost on any new debt will be the same as the yield to maturity on the current bonds.

Preferred Stock: Crow issues preferred stock with a $2.85 dividend per year. They are sold to the market at$27 per share, but issue costs are $2 per share. Retained Earnings: Crow has a just paid a dividend of$2.40. The retention rate is 40% and return on equity (ROE) is 20%. The price of the common stock is $36 per share. 1. Calculate the weighted average cost of capital (WACC). 2. The expansion is expected to produce cash flows of$48,000,000 every year for the next 6 years. Use the WACC to find the net present value (NPV).   Should they expand? Explain.

## Solutions

##### Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

PV FACTOR = 1/(1+r)^n

I HAVE TAKEN WACC = 13.17% FOR CALCULATING NPV, ROUNDED TO 2 DECIMAL WACC FIGURE

NEED TO TAKE FULL FIGURE OF WACC, PLEASE LET ME KNOW, NOTHING WAS MENTIONED, SO TOOK 2 DIGITS

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