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

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Lowes Inc. has 1,100 bonds outstandingthat are selling for $992 each. The bonds carry a 6.0percentcoupon, pay interest semi-annually, and mature in 7.5 years. Thecompany also has 9,500 shares of 5% preferred stock at a marketprice of $40per share. This month, the company paid an annualdividend in the amount of $1.20per share. The dividend growth rateis 5.0percent.The common stock is priced at $30a share and thereare 34,500 shares outstanding. The company is considering a projectthat is equally as risky as the overall company. This project hasinitial costs of $630,000 and operating cash flows of $80,000 ayear for the next 10 yearsand salvage value of $20,000 at the endof 10 years.The net working capital (NWC) is expected to increaseby $10,000 a year until the end of the project life. All the NWCswill be recovered when the project is completed. The project willbe depreciated straight-line to zero over the project’s 10-yearlife. The tax rate is 21%.
What is Kirksville’s weighted average cost of capital?
What is the net present value (NPV) of this project?Should youaccept the project? Explain why.
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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4.4 Ratings (915 Votes)

A Yield of the bonds can be calculated in Excel as RATE153099210000 This includes 15 payments of 30 each with PV being 992 and future value being 1000 This is equal to 3067 for 6 See Answer

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Lowes Inc. has 1,100 bonds outstandingthat are selling for $992 each. The bonds carry a 6.0percentcoupon, pay interest semi-annually, and mature in 7.5 years. Thecompany also has 9,500 shares of 5% preferred stock at a marketprice of $40per share. This month, the company paid an annualdividend in the amount of $1.20per share. The dividend growth rateis 5.0percent.The common stock is priced at $30a share and thereare 34,500 shares outstanding. The company is considering a projectthat is equally as risky as the overall company. This project hasinitial costs of $630,000 and operating cash flows of $80,000 ayear for the next 10 yearsand salvage value of $20,000 at the endof 10 years.The net working capital (NWC) is expected to increaseby $10,000 a year until the end of the project life. All the NWCswill be recovered when the project is completed. The project willbe depreciated straight-line to zero over the project’s 10-yearlife. The tax rate is 21%.What is Kirksville’s weighted average cost of capital?What is the net present value (NPV) of this project?Should youaccept the project? Explain why.What is the internal rate of return (IRR) of this project?Should you accept the project if you apply the IRR decisionrule?