Kro Ltd has designed a new product and conducted a market survey to assess its viability. The survey has determined that the new product will generate sales of $9 million per year. Annual total cost (excluding depreciation expense) will come to $1.2 million. The equipment necessary for production will cost $8 million and is to be depreciated evenly over the project’s life of 4 years (straight-line method). At the end of 4 years, the equipment has a zero scrap value. The tax rate is 30%. The company believes the project is considered to be of similar risk to the company’s existing assets. Kro’s capital consists of the following: Ordinary Shares: The company has 1.5 million ordinary shares outstanding, currently sell for $50 per share and has a beta of 1.6. The market portfolio return is 17% and the risk-free rate is 5% Preference Shares: The company has 200,000 preference shares, which currently sell for $45 and pay a $5 dividend per year. Bonds: The company has 150,000 bonds outstanding that mature in 5 years with an annual coupon of 7.5%, making yearly payments. The bonds have a face value of $1,000 and currently sell in the market for $1080. Therefore, the YTM is 6%. Calculate Kro’s weighted average cost of capital(WACC). Using the NPV criterion, should the project goahead?
Kro Ltd has designed a new product and conducted a market survey to assess its viability. The survey has determined that the new product will generate sales of $9 million per year. Annual total cost (excluding depreciation expense) will come to $1.2 million. The equipment necessary for production will cost $8 million and is to be
Kro’s capital consists of the following:
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Ordinary Shares: |
The company has 1.5 million ordinary shares outstanding, currently sell for $50 per share and has a beta of 1.6. The market portfolio return is 17% and the risk-free rate is 5% |
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The company has 200,000 preference shares, which currently sell for $45 and pay a $5 dividend per year. |
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Bonds: |
The company has 150,000 bonds outstanding that mature in 5 years with an annual coupon of 7.5%, making yearly payments. The bonds have a face value of $1,000 and currently sell in the market for $1080. Therefore, the YTM is 6%. |
Calculate Kro’s weighted average cost of capital(WACC).
Using the
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