Ramblin Wreck is a firm specializing in engineering components. The firm is publicly traded and is...

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Ramblin Wreck is a firm specializing in engineering components.The firm is publicly traded and is considering the followingproject:
The project will last 5.00 years with an annual cash flow of$40.00 million. The project will require an initial investment of$140.00 million
The firm must determine the cost of capital to evaluate theproject. (The project is within the firm’s normal activities)
Ramblin Wreck, Inc. Financial Data:
STOCK DATA: BOND DATA:
Current Price Per Share $28.00 Current Price Per Bond $938.00
# of Shares 2.00 million # of bonds 20,000.00
Book Value $50 million Annual Coupon Rate 8.00%
Face Value Per Bond $1,000
Maturity 10 years

The risk free rate in the economy is currently 2.00%, whileinvestors have a market risk premium of 7.00%. Ramblin Wreck, Inc.has a beta of 1.50. The tax rate is 40.00%.
a. What is the yield to maturity on Ramblin Wreck, Inc.bonds?
b. What is the cost of equity?
c. What is the weight in debt for the project?
d. What is the WACC for the project?
e. What is the NPV of the project? (express in millions, so1000000 would be 1.00)

STOCK DATA:		BOND DATA:
Current Price Per Share	$28.00	Current Price Per Bond	$938.00
# of Shares	2.00 million	# of bonds	20,000.00
Book Value	$50 million	Annual Coupon Rate	8.00%
		Face Value Per Bond	$1,000
		Maturity	10 years

Answer & Explanation Solved by verified expert

4.1 Ratings (535 Votes)

a) interest = 1000*.08= 80

Yield to maturity = [Interest + (face value - price)/years ]/[(face value + price)/2]

=[80+ (1000-938)/10]/[(1000+938)/2]

=[80+ 6.2]/969

= 8.90% (using financial calculator it is 8.96%]

b)cost of equity = Risk free rate+ [Beta *market rik premium]

= 2+ [1.5 *7]

= 2 + 10.5

= 12.5%

c)Weight of debt: 25.0936%

	market value	market value weight
Debt	20000*938= 18760000	18760000/74760000= 25.0936%
equity	2000000*28= 56000000	56000000/74760000= .749064 or 74.9064%

	74760000	100%

	cost	weight	cost* weight
After tax debt	8.96(1-.40)= 5.376	25.0936%	1.35
equity	12.5	74.9064%	9.36

	WACC		10.71%

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Transcribed Image Text

Ramblin Wreck is a firm specializing in engineering components.The firm is publicly traded and is considering the followingproject:The project will last 5.00 years with an annual cash flow of$40.00 million. The project will require an initial investment of$140.00 millionThe firm must determine the cost of capital to evaluate theproject. (The project is within the firm’s normal activities)Ramblin Wreck, Inc. Financial Data:STOCK DATA:BOND DATA:Current Price Per Share$28.00Current Price Per Bond$938.00# of Shares2.00 million# of bonds20,000.00Book Value$50 millionAnnual Coupon Rate8.00%Face Value Per Bond$1,000Maturity10 yearsThe risk free rate in the economy is currently 2.00%, whileinvestors have a market risk premium of 7.00%. Ramblin Wreck, Inc.has a beta of 1.50. The tax rate is 40.00%.a. What is the yield to maturity on Ramblin Wreck, Inc.bonds?b. What is the cost of equity?c. What is the weight in debt for the project?d. What is the WACC for the project?e. What is the NPV of the project? (express in millions, so1000000 would be 1.00)