Kirksville Inc. has 1,100 bondsoutstanding that are selling for $992 each. The bonds carry a 6.0percent coupon, pay interest semi-annually, and mature in 7.5years. The company also has 9,500 shares of 5% preferred stock at amarket price of $40 per share. This month, the company paid anannual dividend in the amount of $1.20 per share. The dividendgrowth rate is 5.0 percent. The common stock is priced at $30 ashare and there are 34,500 shares outstanding. The company isconsidering a project that is equally as risky as the overallcompany. This project has initial costs of $630,000 and operatingcash flows of $80,000 a year for the next 10 years and salvagevalue of $20,000 at the end of 10 years. The net working capital(NWC) is expected to increase by $10,000 a year until the end ofthe project life. All the NWCs will be recovered when the projectis completed. The project will be depreciated straight-line to zeroover the project’s 10-year life. The tax rate is 21%.
- (15 points) What is Kirksville’s weighted average cost ofcapital?
- (10 points) What is the net present value (NPV) of thisproject? Should you accept the project? Explain why.
- (5 points) What is the internal rate of return (IRR) of thisproject? Should you accept the project if you apply the IRRdecision rule?
