Stepping Razor Ltd is currently considering investing in a capital project. The following information has...
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Finance
Stepping Razor Ltd is currently considering investing in a capital project. The following information has been provided:
Debt The company currently has 4,500, 5% coupon, semi-annual bonds. The bonds are trading at 85% of par and have 15 years to maturity.
Common Stock 150,000 shares are in issue, trading at $60. Stepping razors common stock has a beta of 1.35. The Treasury Bill rate is 5%, while the average stock returns 8%.
Preferred Stock These 7%, $100 par securities currently trade at $125. The company has issued a total of 23,000 to date.
The corporate tax rate is 40%.
Required:
a. Calculate:
i. The total market value of the company
ii. Stepping Razors weighted average cost of capital [10 marks]
b. Sandra Hamilton, a senior member of the Marketing Department has taken an interest and has asked you to explain the process. Prepare a memo to Ms. Hamilton outlining:
i. The use of the wacc, as opposed to a single-project rate in making this decision [5 marks]
ii. The benefits of using market-value rather than book value in calculating component weights [5 marks
iii. Why it might have been more appropriate to use the CAPM method of calculating the cost of equity rather than the DCF approach [5 marks]
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