Kiwi Helicopters Ltd has a target capital structure of 70% ordinary common shares and 30% debt....

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Kiwi Helicopters Ltd has a target capital structure of 70%ordinary common shares and 30% debt. They issued a twenty-year, 5%bond 10 years ago. The bond currently has a yield-to-maturity of7.5%. The ordinary common shares are currently selling for $45.They have a beta of 1.75 and are expected to pay a $3.25 dividendnext year. The firm has a 30% marginal tax rate. The market has anexpected return of 12%. Treasury bills are currently paying 2%.
Required: (a) Calculate the appropriate discount ratefor the average project for Kiwi Helicopters Ltd.
Kiwi Helicopters Ltd is considering a project that will provideafter-tax cash flows of $225,000 for the next 7 years. The projectwill cost $1,000,000 and will have a salvage value of $200,000.
Required: (b) Should they do the project? Show yourworkings and justify your answer.

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3.7 Ratings (307 Votes)

a The appropriate discount rate for the average project forKiwi Helicopters Ltd is WACC of firmWACC wd kd we reWherewd is the weight of debt 30 or 03we is the weight of common equity 70 or 07Cost of debt yield to maturity 75And marginal tax rate 30Therefore the aftertax cost See Answer

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Kiwi Helicopters Ltd has a target capital structure of 70%ordinary common shares and 30% debt. They issued a twenty-year, 5%bond 10 years ago. The bond currently has a yield-to-maturity of7.5%. The ordinary common shares are currently selling for $45.They have a beta of 1.75 and are expected to pay a $3.25 dividendnext year. The firm has a 30% marginal tax rate. The market has anexpected return of 12%. Treasury bills are currently paying 2%.Required: (a) Calculate the appropriate discount ratefor the average project for Kiwi Helicopters Ltd. Kiwi Helicopters Ltd is considering a project that will provideafter-tax cash flows of $225,000 for the next 7 years. The projectwill cost $1,000,000 and will have a salvage value of $200,000.Required: (b) Should they do the project? Show yourworkings and justify your answer.