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The preferred stock price per share is $40 and pays a $2 dividend. Common stock shares sell for $20 and pay a $2 dividend. Dividends for common stock are expected to grow by 1%. Bond price is $960, and the bond coupon rate is 5.5%. The bonds mature in 6 years.

The preferred stock price per share is $40 and pays a $2 dividend. Common stock shares sell for $20 and pay a $2 dividend. Dividends for common stock are expected to grow by 1%. Bond price is $960, and the bond coupon rate is 5.5%. The bonds mature in 6 years.

Essentials Of Investments
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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A firm has the following capital structure: 1. Bonds with market value of $2,000,000 2. Preferred Stock with a market value of $700,000 3. Common stock, of which 100,000 shares is outstanding. Presently, each common stock is selling at $20 per share The preferred stock price per share is $40 and pays a $2 dividend. Common stock shares sell for $20 and pay a $2 dividend. Dividends for common stock are expected to grow by 1%. Bond price is $960, and the bond coupon rate is 5.5%. The bonds mature in 6 years. The firm's tax rate is 38%. The company has $2,000,000 in sales, and expenses of $1,100,000. The initial investment of $5,000,000 will be depreciated straight-line over 10 years. The project is expected to last 10 years. 1. What is the firm's Weighted Average Cost of Capital (WACC)? 2. What is the firm's Operating Cash Flow (OCF)? 3. Using the WACC is the NPV, using the WACC (use the answer from question 1 above). and OCF (use the answer from question 2 above)? 4. Based on your answer to question #3, would you accept or reject the project? Explain why?
Transcribed Image Text:A firm has the following capital structure: 1. Bonds with market value of $2,000,000 2. Preferred Stock with a market value of $700,000 3. Common stock, of which 100,000 shares is outstanding. Presently, each common stock is selling at $20 per share The preferred stock price per share is $40 and pays a $2 dividend. Common stock shares sell for $20 and pay a $2 dividend. Dividends for common stock are expected to grow by 1%. Bond price is $960, and the bond coupon rate is 5.5%. The bonds mature in 6 years. The firm's tax rate is 38%. The company has $2,000,000 in sales, and expenses of $1,100,000. The initial investment of $5,000,000 will be depreciated straight-line over 10 years. The project is expected to last 10 years. 1. What is the firm's Weighted Average Cost of Capital (WACC)? 2. What is the firm's Operating Cash Flow (OCF)? 3. Using the WACC is the NPV, using the WACC (use the answer from question 1 above). and OCF (use the answer from question 2 above)? 4. Based on your answer to question #3, would you accept or reject the project? Explain why?
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