Trader Bubba Industries must choose between solar and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The solar truck will cost more but will be less expensive to operate; it will cost $70,000, whereas the electric-powered truck will cost $60,000. The life for both types of truck is estimated to be 8 years, during which time the net cash flows for the solar-powered truck will be $20,000 per year and those for the electric-powered truck will be $12,000 per year. Trader Bubba Industries’ assets are $400 million, financed through bank loans, bonds, preferred stocks, and common stocks. The amounts are as follows: Bank loans: $50 million borrowed at 6% Bonds: $200 million, paying 8% coupon with semi-annual payments, and maturity of 10 years. Trader Bubba sold its $1,000 par-value bonds for $1020 and had to incur $20 flotation cost per bond. Preferred Stocks: $100 million, paying $20 dividends per share. Trader Bubba sold its preferred shares for $220 and had to incur $20 per share flotation cost. Common Stocks: $50 million, beta is 2, the risk-free rate is 2 percent, and the market rate is 8%. Tax rate: 25 percent Please answer the following questions using the information above. Don’t forget to show all your work. a) What is the after-tax cost of the loans? b) What is the after-tax cost of the bonds? c) What is the after-tax cost of the preferred stocks? d) What is the after-tax cost of the common stocks? e) Calculate the weighted average cost of capital (WACC). Please show your work precisely by indicating each component and weight. f) Calculate the NPV and IRR for each type of truck and decide which to recommend. (Use the cost of capital you found in “e” when calculating the NPV and IRR)
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Trader Bubba Industries must choose between solar and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The solar truck will cost more but will be less expensive to operate; it will cost $70,000, whereas the electric-powered truck will cost $60,000. The life for both types of truck is estimated to be 8 years, during which time the net cash flows for the solar-powered truck will be $20,000 per year and those for the electric-powered truck will be $12,000 per year. Trader Bubba Industries’ assets are $400 million, financed through bank loans, bonds, preferred stocks, and common stocks. The amounts are as follows: Bank loans: $50 million borrowed at 6% Bonds: $200 million, paying 8% coupon with semi-annual payments, and maturity of 10 years. Trader Bubba sold its $1,000 par-
a) What is the after-tax cost of the loans?
b) What is the after-tax cost of the bonds?
c) What is the after-tax cost of the preferred stocks?
d) What is the after-tax cost of the common stocks?
e) Calculate the weighted average cost of capital (WACC). Please show your work precisely by indicating each component and weight.
f) Calculate the
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