Market Values of Capital• The company has 81,000 bonds with a 30-year life outstanding, with 15 years untilmaturity. The bonds carry a 10 percent semi-annual coupon, and are currently sellingfor $899.24.• The company also has 150,000 shares of $100 par, 9% dividend perpetual preferredstock outstanding. The current market price is $90.00. Any new issues of preferredstock would incur a 3.6% per share flotation cost.• The company has 5 million shares of common stock outstanding with a current priceof $29.84 per share. The stock exhibits a constant growth rate of 10 percent. The lastdividend (D0) was $.80. New stock could be sold with flotation costs of 6.7% pershare.• The risk-free rate is currently 6 percent, and the rate of return on the stock market as awhole is 13 percent. Your stock’s beta is 1.18.• Your firm does not use notes payable for long-term financing.• Your firm’s federal + state marginal tax rate is 28%.• For all projects, the reinvestment rate shall be 9.5% Project B:This project requires an initial investment of $20,000,000 in equipment which willrequire additional expense of $1,000,000 to install in the current facility. Consistent withother projects, the equipment will be depreciated using the MACRS Investment Classschedule. Once installed, the firm will need to increase inventory by $6,000,000. Theproject will last 6 years, but at the end of that period, the equipment will have no salvagevalue.During the operational period of this project, the product produced will sell for $6.50 perunit. The costs related to this product will be $4.00 per unit in variable cost and the fixedcosts each year will be $1,000,000. Management has estimated that the sales volume forthis project will be 3,500,000 in year 1, 4,000,000 in year 2, 4,250,000 in year 3,4,500,000 in year 4, 4,300,000 in year 5, and 4,200,000 in year 6. Since this project hasbeen brought under consideration through the normal channels, a discount rate equal tothe WACC should be used in the project valuation.
Market Values of Capital
• The company has 81,000 bonds with a 30-year life outstanding, with 15 years until
maturity. The bonds carry a 10 percent semi-annual coupon, and are currently selling
for $899.24.
• The company also has 150,000 shares of $100 par, 9% dividend perpetual preferred
stock outstanding. The current market price is $90.00. Any new issues of preferred
stock would incur a 3.6% per share flotation cost.
• The company has 5 million shares of common stock outstanding with a current price
of $29.84 per share. The stock exhibits a constant growth rate of 10 percent. The last
dividend (D0) was $.80. New stock could be sold with flotation costs of 6.7% per
share.
• The risk-free rate is currently 6 percent, and the
whole is 13 percent. Your stock’s beta is 1.18.
• Your firm does not use notes payable for long-term financing.
• Your firm’s federal + state marginal tax rate is 28%.
• For all projects, the reinvestment rate shall be 9.5% Project B:
This project requires an initial investment of $20,000,000 in equipment which will
require additional expense of $1,000,000 to install in the current facility. Consistent with
other projects, the equipment will be
schedule. Once installed, the firm will need to increase inventory by $6,000,000. The
project will last 6 years, but at the end of that period, the equipment will have no salvage
value.
During the operational period of this project, the product produced will sell for $6.50 per
unit. The costs related to this product will be $4.00 per unit in variable cost and the fixed
costs each year will be $1,000,000. Management has estimated that the sales volume for
this project will be 3,500,000 in year 1, 4,000,000 in year 2, 4,250,000 in year 3,
4,500,000 in year 4, 4,300,000 in year 5, and 4,200,000 in year 6. Since this project has
been brought under consideration through the normal channels, a discount rate equal to
the WACC should be used in the project valuation.
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