1. Use the following information provided and the answers to the questions below to predict what...

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Finance

1. Use the following information provided and the answers to thequestions below to predict what the weighted average cost ofcapital might be in the future. Then, use the WACC to make aninformed decision about whether or not the company should invest ina new project. Publicly traded companies are required to produceannual accounting reports (10-K) for the SEC detailing thefinancial operations of the past year. Suppose that you look up acompany and find that they report $6,427 million worth of long-termdebt and $882 million worth of shareholders equity. Then you lookat yahoo.finance.com and find that the stock is currently tradingfor $62.50 per share and that there are 200 million sharesoutstanding. As the result of the most recent tax plan, the companywill pay a fixed 21% in taxes. There is no preferred stock.
a. What is the market value of equity?

62.50 x 200M = 12500

b. Use the market value of equity to find the value of the firm.What is the weight of debt and equity?

V= D+E+P= 18927
W_E= E/V= 12500/18927=.66
WD =6427/18927= .34

c. If the most recent bond issued is currently trading for $1120,has a 6.625% annual coupon, and has 8 years left until maturitywhat is the company’s current cost of debt?
d. If the most recent annual dividend was $4 and the dividend isexpected to grow at a constant rate of 5.5% going forward, what isthe company’s current cost of equity?
e. Assume that past information about the company (cost of debt,cost of equity, etc) is a good indicator of future information.Based on the above information what will to company’s WACC be forfuture projects?
f. Now consider the following project. At the end of the first yearof the project they could earn net operating cash flow of $1million, $2 million the following year and, $3 million in the lastyear. If the project requires an initial investment (upfront cost)of $5 million, what is the project’s payback, NPV, and IRR? Basedon this information, would you advise them to accept the project?Why?
g. The company is considering a different project that could earnnet operating cash flows of $500,000 per year for the next 10years. The project costs $4 million. What is the project’s payback,NPV, and IRR? Would you advise them to accept the project? Why?

Answer & Explanation Solved by verified expert

3.7 Ratings (595 Votes)

a and b are solved correctlyccost of debt YTM 1 tax rateYTM is calculated using RATE function in Excel with these inputsnper 8 8 years to maturitypmt 1000 6625 annual coupon payment face value coupon rate This is entered with a positive sign because it is acash See Answer

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1. Use the following information provided and the answers to thequestions below to predict what the weighted average cost ofcapital might be in the future. Then, use the WACC to make aninformed decision about whether or not the company should invest ina new project. Publicly traded companies are required to produceannual accounting reports (10-K) for the SEC detailing thefinancial operations of the past year. Suppose that you look up acompany and find that they report $6,427 million worth of long-termdebt and $882 million worth of shareholders equity. Then you lookat yahoo.finance.com and find that the stock is currently tradingfor $62.50 per share and that there are 200 million sharesoutstanding. As the result of the most recent tax plan, the companywill pay a fixed 21% in taxes. There is no preferred stock.a. What is the market value of equity?62.50 x 200M = 12500b. Use the market value of equity to find the value of the firm.What is the weight of debt and equity?V= D+E+P= 18927WE= E/V= 12500/18927=.66WD =6427/18927= .34c. If the most recent bond issued is currently trading for $1120,has a 6.625% annual coupon, and has 8 years left until maturitywhat is the company’s current cost of debt?d. If the most recent annual dividend was $4 and the dividend isexpected to grow at a constant rate of 5.5% going forward, what isthe company’s current cost of equity?e. Assume that past information about the company (cost of debt,cost of equity, etc) is a good indicator of future information.Based on the above information what will to company’s WACC be forfuture projects?f. Now consider the following project. At the end of the first yearof the project they could earn net operating cash flow of $1million, $2 million the following year and, $3 million in the lastyear. If the project requires an initial investment (upfront cost)of $5 million, what is the project’s payback, NPV, and IRR? Basedon this information, would you advise them to accept the project?Why?g. The company is considering a different project that could earnnet operating cash flows of $500,000 per year for the next 10years. The project costs $4 million. What is the project’s payback,NPV, and IRR? Would you advise them to accept the project? Why?