Kimoto Ltd has designed a new product and conducted a market survey costing $30,000 to assess its viability. The survey has determined that the new product will generate sales of $1,200,000 per year. Fixed costs associated with the product will be $50,000 a year and variable costs will amount to 35% of sales. The equipment necessary for production will cost $1,500,000 and is to be depreciated evenly over the project’s life of 5 years (straight-line method). In addition, $45,000 in net working capital is required to fund the project. The tax rate is 30%. The company believes the risk of the new project is the same as the risk of the company’s existing assets. Kimoto’s capital consists of the following : Ordinary Shares: The company has 2 million ordinary shares outstanding, currently selling for $150 per share and a beta of 1.2. The market risk premium (rm-rf) is 8% and the risk-free rate is 3%. Preference Shares: The company has 1 million preference shares, currently selling for $85 and paying an $8 dividend. Bonds: The company has 120,000 bonds outstanding that mature in 4 years with an annual coupon of 8%, making half-yearly payments. The bonds have a face value of $1,000 and currently sell in the market for $960. Therefore, the annual YTM is 9.2%. (a)Calculate Kimoto’s weighted average cost of capital (WACC) (b)Using the NPV criterion, should the project go ahead?
Kimoto Ltd has designed a new product and conducted a market survey costing $30,000 to assess its viability. The survey has determined that the new product will generate sales of $1,200,000 per year. Fixed costs associated with the product will be $50,000 a year and variable costs will amount to 35% of sales. The equipment necessary for production will cost $1,500,000 and is to be depreciated evenly over the project’s life of 5 years (straight-line method). In addition, $45,000 in net working capital is required to fund the project. The tax rate is 30%. The company believes the risk of the new project is the same as the risk of the company’s existing assets. Kimoto’s capital consists of the following : Ordinary Shares: The company has 2 million ordinary shares outstanding, currently selling for $150 per share and a beta of 1.2. The market risk premium (rm-rf) is 8% and the risk-free rate is 3%. Preference Shares: The company has 1 million preference shares, currently selling for $85 and paying an $8 dividend. Bonds: The company has 120,000 bonds outstanding that mature in 4 years with an annual coupon of 8%, making half-yearly payments. The bonds have a face value of $1,000 and currently sell in the market for $960. Therefore, the annual YTM is 9.2%. (a)Calculate Kimoto’s weighted average cost of capital (WACC) (b)Using the NPV criterion, should the project go ahead?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Kimoto Ltd has designed a new product and conducted a market survey costing $30,000 to assess its viability. The survey has determined that the new product will generate sales of $1,200,000 per year. Fixed costs associated with the product will be $50,000 a year and variable costs will amount to 35% of sales. The equipment necessary for production will cost $1,500,000 and is to be
The company believes the risk of the new project is the same as the risk of the company’s existing assets.
Kimoto’s capital consists of the following :
Ordinary Shares:
- The company has 2 million ordinary shares outstanding, currently selling for $150 per share and a beta of 1.2.
- The market risk premium (rm-rf) is 8% and the risk-free rate is 3%.
- The company has 1 million preference shares, currently selling for $85 and paying an $8 dividend.
Bonds:
- The company has 120,000 bonds outstanding that mature in 4 years with an annual coupon of 8%, making half-yearly payments. The bonds have a face value of $1,000 and currently sell in the market for $960. Therefore, the annual YTM is 9.2%.
(a)Calculate Kimoto’s weighted average cost of capital (WACC)
(b)Using the
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