Consider the following information on Huntington Power Co. Debt: 4,000, 7% semiannual coupon bonds outstanding, $1,000...

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Finance

Consider the following information on Huntington Power Co.
Debt: 4,000, 7% semiannual coupon bonds outstanding, $1,000 parvalue, 18 years to maturity, selling for 102 percent of par; thebonds make semiannual payments.
Preferred Stock: 10,000 outstanding with par value of $100 and amarket value of 105 and $10 annual dividend.
Common Stock: 84,000 shares outstanding, selling for $56 pershare, the beta is 2.08
The market risk premium is 5.5%, the risk free rate is 3.5% andHuntington’s tax rate is 32%.
Huntington Power Co. is evaluating two mutually exclusiveproject that is somewhat riskier than the usual project the firmundertakes; management uses the subjective approach and decided toapply an adjustment factor of +2.1% to the cost of capital for bothprojects.
Project A is a five-year project that requires an initial fixedasset investment of $2.4 million. The fixed asset falls into thefive-year MACRS class. The project is estimated to generate$2,050,000 in annual sales, with costs of $950,000. The projectrequires an initial investment in net working capital of $285,000and the fixed asset will have a market value of $225,000 at the endof five years when the project is terminated.
Project B requires an initial fixed asset investment of $1.0million. The marketing department predicts that sales related tothe project will be $920,000 per year for the next five years,after which the market will cease to exist. The machine will bedepreciated down to zero over four-year using the straight-linemethod (depreciable life 4 years while economic life 5 years). Costof goods sold and operating expenses related to the project arepredicted to be 25 percent of sales. The project will also requirean addition to net working capital of $150,000 immediately. Theasset is expected to have a market value of $120,000 at the end offive years when the project is terminated.
Use the following rates for 5-year MACRS: 20%, 32%, 19.2%,11.52%, 11.52%, and 5.76%
Calculate WACC for the firm.
What is the appropriate discount rate for project A and projectB (Risk adjusted rate)?
Calculate project A’s cash flows for years 0-5
Calculate NPV, IRR and PI for project A
Calculate project B’s cash flows for year 0-5
Calculate NPV, IRR and PI for project B
Which project should be accepted if any and why?
What is the exact NPV profile’s crossover rate (incrementalIRR)?

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A CALCULATION OF WACC PARTICULARS CALCULATION AMOUNT WEIGHT COST FORMULA CALCULATION WEIGHTED COST WEIGHTSCOST Debt 40001000102 4080000 041 476 INTEREST 1TAX RATE 71032 197 Prefered Stock 10000105 1050000 011 10 DIVIDENDPAR VALUE 10100100 107 Common Stock 8400056 4704000 048 1494 RISKFREE RATE BETAMARKET RISK PREMIUM 3520855 715 TOTAL 9834000 100 WACC 1019 BCALCULATION OF APPROPRIATE DISCOUNT RATE 1 Given that both the projects are exclusive projects Also an adjustment factor of 21 is given as a risk adjustment factor 2 Hence See Answer

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Consider the following information on Huntington Power Co.Debt: 4,000, 7% semiannual coupon bonds outstanding, $1,000 parvalue, 18 years to maturity, selling for 102 percent of par; thebonds make semiannual payments.Preferred Stock: 10,000 outstanding with par value of $100 and amarket value of 105 and $10 annual dividend.Common Stock: 84,000 shares outstanding, selling for $56 pershare, the beta is 2.08The market risk premium is 5.5%, the risk free rate is 3.5% andHuntington’s tax rate is 32%.Huntington Power Co. is evaluating two mutually exclusiveproject that is somewhat riskier than the usual project the firmundertakes; management uses the subjective approach and decided toapply an adjustment factor of +2.1% to the cost of capital for bothprojects.Project A is a five-year project that requires an initial fixedasset investment of $2.4 million. The fixed asset falls into thefive-year MACRS class. The project is estimated to generate$2,050,000 in annual sales, with costs of $950,000. The projectrequires an initial investment in net working capital of $285,000and the fixed asset will have a market value of $225,000 at the endof five years when the project is terminated.Project B requires an initial fixed asset investment of $1.0million. The marketing department predicts that sales related tothe project will be $920,000 per year for the next five years,after which the market will cease to exist. The machine will bedepreciated down to zero over four-year using the straight-linemethod (depreciable life 4 years while economic life 5 years). Costof goods sold and operating expenses related to the project arepredicted to be 25 percent of sales. The project will also requirean addition to net working capital of $150,000 immediately. Theasset is expected to have a market value of $120,000 at the end offive years when the project is terminated.Use the following rates for 5-year MACRS: 20%, 32%, 19.2%,11.52%, 11.52%, and 5.76%Calculate WACC for the firm.What is the appropriate discount rate for project A and projectB (Risk adjusted rate)?Calculate project A’s cash flows for years 0-5Calculate NPV, IRR and PI for project ACalculate project B’s cash flows for year 0-5Calculate NPV, IRR and PI for project BWhich project should be accepted if any and why?What is the exact NPV profile’s crossover rate (incrementalIRR)?