a) What is the nominal weighted-average cost of capital (WACC) for this project? b) As CFO, do you recommend investment in this project? Justify your answer (numerically).
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
You have the following initial information on Financeur Co. on which to base your calculations
and discussion for questions 1) and 2): (Answers in Excel if possible)
• Current long-term and target debt-equity ratio (D:E) = 1:3
• Corporate tax rate (TC) = 30%
• Expected Inflation = 1.55%
• Equity beta (E) = 1.6345
• Debt beta (D) = 0.15
• Expected market premium (rM – rF) = 6.00%
• Risk-free rate (rF) =2%
1) The CEO of Financeur Co., for which you are CFO, has requested that you evaluate a
potential investment in a new project. The proposed project requires an initial outlay of
$7.26 billion. Once completed (1 year from initial outlay) it will provide a real net cash
flow of $555 million in perpetuity following its completion. It has the same business risk
as Financeur Co.’s existing activities and will be funded using the firm’s current target D:E
ratio.
a) What is the nominal weighted-average cost of capital (WACC) for this project?
b) As CFO, do you recommend investment in this project? Justify your answer
(numerically).
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