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 A:This project requires an initial investment of $20,000,000 in equipment which will costan additional $3,000,000 to install. The firm will use the attached MACRS depreciationschedule to expense this equipment. Once the equipment is installed, the company willneed to increase raw goods inventory by $5,000,000, but it will also see an increase inaccounts payable of $1,500,000. With this investment, the project will last 6 years atwhich time the market value for the equipment will be $1,000,000.The project will produce a product with a sales price of $20.00 per unit and the variablecost per unit will be $10.00. It is estimated the sales volume for this project will be700,000 in year 1, 1,000,000 in year 2, 650,000 in year 3, 700,000 in year 4, 650,000 inyear 5 and 550,000 in year 6. The fixed costs would be $2,000,000 per year. Becausethis project could use some existing company infrastructure, management has expressedsome favoritism towards this project and as allowed for a reduced rate of return of 2percentage point below its current WACC as the valuation hurdle it must meet or surpass. 1. 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 A:
This project requires an initial investment of $20,000,000 in equipment which will cost
an additional $3,000,000 to install. The firm will use the attached MACRS depreciation
schedule to expense this equipment. Once the equipment is installed, the company will
need to increase raw goods inventory by $5,000,000, but it will also see an increase in
accounts payable of $1,500,000. With this investment, the project will last 6 years at
which time the market value for the equipment will be $1,000,000.
The project will produce a product with a sales price of $20.00 per unit and the variable
cost per unit will be $10.00. It is estimated the sales volume for this project will be
700,000 in year 1, 1,000,000 in year 2, 650,000 in year 3, 700,000 in year 4, 650,000 in
year 5 and 550,000 in year 6. The fixed costs would be $2,000,000 per year. Because
this project could use some existing company infrastructure, management has expressed
some favoritism towards this project and as allowed for a reduced rate of return of 2
percentage point below its current WACC as the valuation hurdle it must meet or surpass.
1. 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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