Walton Group is considering a project to start manufacturing cars for Bangladesh market. The project requires an initial investment of 10 million and has a 5 years life. The yearly cash flows are given in the picture. To fund this project, Walton will raise 40% of capital issuing bonds and the rest of the capital will be coming from issuing new common stocks. Walton will issue bonds with 10% coupon, having 15 years maturity. To sell the issue, an average discount of $20 per bond needs to be offered. There is an associated flotation cost of 3% of the par value. The company paid $2.25 common stock dividend last year. The company's policy is to allow its dividend to grow at 5 percent per year indefinitely. The stocks are currently selling in market for $50. But to attract investors, underwriter suggested an underpricing of $3 with underwriter's fee of $2 per share. Walton is in 35% tax bracket. * A. Calculate Weighted Average cost of capital for Walton Group. B. Decide if the project is feasible to take with respect to Net Present Value and Payback Period capital budgeting techniques. [Assume the acceptable payback period is 4 years and the project is independent) Cash flows 1,600,000 2,800,000 2,250,000 3,000,000 2,700,000 Year 1 Year 2 Year 3 Year 4 Year 5
Walton Group is considering a project to start manufacturing cars for Bangladesh market. The project requires an initial investment of 10 million and has a 5 years life. The yearly cash flows are given in the picture. To fund this project, Walton will raise 40% of capital issuing bonds and the rest of the capital will be coming from issuing new common stocks. Walton will issue bonds with 10% coupon, having 15 years maturity. To sell the issue, an average discount of $20 per bond needs to be offered. There is an associated flotation cost of 3% of the par value. The company paid $2.25 common stock dividend last year. The company's policy is to allow its dividend to grow at 5 percent per year indefinitely. The stocks are currently selling in market for $50. But to attract investors, underwriter suggested an underpricing of $3 with underwriter's fee of $2 per share. Walton is in 35% tax bracket. * A. Calculate Weighted Average cost of capital for Walton Group. B. Decide if the project is feasible to take with respect to Net Present Value and Payback Period capital budgeting techniques. [Assume the acceptable payback period is 4 years and the project is independent) Cash flows 1,600,000 2,800,000 2,250,000 3,000,000 2,700,000 Year 1 Year 2 Year 3 Year 4 Year 5
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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Walton Group is considering a project to start manufacturing cars for Bangladesh market
Transcribed Image Text:Walton Group is considering a project to start manufacturing cars for
Bangladesh market. The project requires an initial investment of 10 million
and has a 5 years life. The yearly cash flows are given in the picture. To
fund this project, Walton will raise 40% of capital issuing bonds and the
rest of the capital will be coming from issuing new common stocks.
Walton will issue bonds with 10% coupon, having 15 years maturity. To sell
the issue, an average discount of $20 per bond needs to be offered.
There is an associated flotation cost of 3% of the par value. The company
paid $2.25 common stock dividend last year. The company's policy is to
allow its dividend to grow at 5 percent per year indefinitely. The stocks
are currently selling in market for $50. But to attract investors,
underwriter suggested an underpricing of $3 with underwriter's fee of $2
per share. Walton is in 35% tax bracket. *
A. Calculate Weighted Average cost of capital for Walton Group. B. Decide if the project is
feasible to take with respect to Net Present Value and Payback Period capital budgeting
techniques. [Assume the acceptable payback period is 4 years and the project is independent)
Cash flows
1,600,000
2,800,000
2,250,000
3,000,000
2,700,000
Year 1
Year 2
Year 3
Year 4
Year 5
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