Kirksville Inc. has 1,100 bonds outstanding that are selling for $992 each. The bonds carry a...

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Kirksville Inc. has 1,100 bonds outstanding that are selling for$992 each. The bonds carry a 6.0 percent coupon, pay interestsemi-annually, and mature in 7.5 years. The company also has 9,500shares of 5% preferred stock at a market price of $40 per share.This month, the company paid an annual dividend in the amount of$1.20 per share. The dividend growth rate is 5.0 percent. Thecommon stock is priced at $30 a share and there are 34,500 sharesoutstanding. The company is considering a project that is equallyas risky as the overall company. This project has initial costs of$630,000 and operating cash flows of $80,000 a year for the next 10years and salvage value of $20,000 at the end of 10 years. The networking capital (NWC) is expected to increase by $10,000 a yearuntil the end of the project life. All the NWCs will be recoveredwhen the project is completed. The project will be depreciatedstraight-line to zero over the project’s 10-year life. The tax rateis 21%.
(a) What is Kirksville’s weighted average cost of capital?
(b) What is the net present value (NPV) of this project? Shouldyou accept the project? Explain why.
(c) What is the internal rate of return (IRR) of this project?Should you accept the project if you apply the IRR decisionrule?
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3.8 Ratings (601 Votes)

WACC weight of debt cost of debt weight of preferredstock cost of preferred stock weight of equity cost ofequitymarket value of debt 992 1100 1091200market value of preferred stock 9500 40 380000market value of equity 34500 30 1035000total market value 1091200 380000 1035000 2506200weight of debt 1091200 2506200 See Answer

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Kirksville Inc. has 1,100 bonds outstanding that are selling for$992 each. The bonds carry a 6.0 percent coupon, pay interestsemi-annually, and mature in 7.5 years. The company also has 9,500shares of 5% preferred stock at a market price of $40 per share.This month, the company paid an annual dividend in the amount of$1.20 per share. The dividend growth rate is 5.0 percent. Thecommon stock is priced at $30 a share and there are 34,500 sharesoutstanding. The company is considering a project that is equallyas risky as the overall company. This project has initial costs of$630,000 and operating cash flows of $80,000 a year for the next 10years and salvage value of $20,000 at the end of 10 years. The networking capital (NWC) is expected to increase by $10,000 a yearuntil the end of the project life. All the NWCs will be recoveredwhen the project is completed. The project will be depreciatedstraight-line to zero over the project’s 10-year life. The tax rateis 21%.(a) What is Kirksville’s weighted average cost of capital?(b) What is the net present value (NPV) of this project? Shouldyou accept the project? Explain why.(c) What is the internal rate of return (IRR) of this project?Should you accept the project if you apply the IRR decisionrule?Show all Work!