• 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 C:This project is significantly outside of the normal products sold of the firm. The projectis a reconsideration of a project proposed two years ago by a former manager. At thattime a marketing study costing $200,000 was done; however, the project was notundertaken. Now the firm needs to consider if this project is worth the firm’s capitalinvestment dollars. This project would require investment in equipment of $20,000,000with an additional cost of $5,000,000 in installation fees. The project will be depreciatedusing the MACRS schedule. At the end of the project, management estimates that theequipment could be sold at a market value of $5,000,000. This project also creates aneed to increase raw goods inventory by $6,000,000.During the operational cycle of this project, the product would have a sales price of$90.00 per unit. Costs associated with this project would be $65.00 in variable cost perunit and a fixed cost per year of $5,000,000. Management estimates that the salesvolume would be 500,000 units in year 1, 600,000 units in year 2, 700,000 units in year3, 800,000 units in year 4, 800,000 units in year 5, and 600,000 units in year 6. Becausemanagement is uneasy with undertaking a project so far outside of its normal productportfolio, it is imposing a 3-percentage-point premium above the WACC as the requiredrate of return on the project Calculate the costs of the individual capital components:a. Before-tax cost of long-term debtb. After-tax cost of long-term debtc. Cost of preferred stockd. Average cost of retained earnings (average of both values below)i. Capital Asset Pricing Model methodii. Dividend Discount Model method2. Determine the target percentages for the optimal capital structure, and thencompute the WACC. (Carry weights to four decimal places. For example: 0.2973or 29.73%)3. Create a valuation spreadsheet for each of the projects mentioned above.Evaluate each project according to the following valuation methods:a. Net Present Value of Discounted Cash Flowb. Internal Rate of Returnc. Modified Internal Rate of Returnd. Payback Period
• 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 C:
This project is significantly outside of the normal products sold of the firm. The project
is a reconsideration of a project proposed two years ago by a former manager. At that
time a marketing study costing $200,000 was done; however, the project was not
undertaken. Now the firm needs to consider if this project is worth the firm’s capital
investment dollars. This project would require investment in equipment of $20,000,000
with an additional cost of $5,000,000 in installation fees. The project will be depreciated
using the MACRS schedule. At the end of the project, management estimates that the
equipment could be sold at a market value of $5,000,000. This project also creates a
need to increase raw goods inventory by $6,000,000.
During the operational cycle of this project, the product would have a sales price of
$90.00 per unit. Costs associated with this project would be $65.00 in variable cost per
unit and a fixed cost per year of $5,000,000. Management estimates that the sales
volume would be 500,000 units in year 1, 600,000 units in year 2, 700,000 units in year
3, 800,000 units in year 4, 800,000 units in year 5, and 600,000 units in year 6. Because
management is uneasy with undertaking a project so far outside of its normal product
portfolio, it is imposing a 3-percentage-point premium above the WACC as the required
rate of return on the project Calculate the costs of the individual capital components:
a. Before-tax cost of long-term debt
b. After-tax cost of long-term debt
c. Cost of preferred stock
d. Average cost of
i.
ii. Dividend Discount Model method
2. Determine the target percentages for the optimal capital structure, and then
compute the WACC. (Carry weights to four decimal places. For example: 0.2973
or 29.73%)
3. Create a valuation spreadsheet for each of the projects mentioned above.
Evaluate each project according to the following valuation methods:
a.
b. Internal Rate of Return
c. Modified Internal Rate of Return
d. Payback Period
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