Question

answer both a & b

(a) Your company is considering an investment in the following project. Initial Investment =-$150,000 Cash Flow Year 1= $40,000 Cash Flow Year 2= $90,000 Cash Flow Year 3- $60,000 Cash Flow Year 4= $0 Cash Flow Year 5 $80,000 The required rate of return on this project is 15% (Calculate the Payback Period of the project (3 marks) (i) Calculate the Net Present Value of the project (5 marks) The Benny Company has the following sources of financing: (b) Bond: A bond selling to yield 12 percent after flotation costs, but prior to adjusting for the marginal corporate tax rate of 34 percent. In other words, 12 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows (principal and interest) Preferred stock: A preferred stock selling for $100 with an annual dividend payment of $8. If the company sells a new issue, the flotation cost will be $9 per share. Internal common equity: Totaling $4.8 million. The price of the common stock is $75 per share, and the dividend per share was $9.80 last year. The dividend is not expected to increase. Compute the following: After-tax cost of debt (5 marks) (5 marks) (i) Cost of preferred stock (5 marks) (iiCost of intemal common equity (iv) If the weighted average cost is to be measured by following weights: 40% bond, 10% preferred stock, and 50% internal common equity, what is the firm's weighted cost of capital? (2 marks)

Answer 1

Hello,
As per details given in the queston

Part a)
NPV= PV of inflow - Outflow

year	Cashflow	Pv of cashflow @15%	cummulative cashflow
0	-150000	($150,000)	-150000
1	40000	$34,782.61	$34,782.61
2	90000	$68,052.93	$102,835.54
3	60000	$39,450.97	$142,286.51
4	0	$0.00	$142,286.51
5	80000	$39,774.14	$182,060.65
NPV		$32,060.65
Payback period		$4.10

B)
1) cot of debt (kd) = 12%(1-t)
kd = 12%(1-.34)
kd=7.92%

2) cost of preference dividend (kp) = $\frac{annual dividend}{net proceeds after floation cost}$

Kp = $\frac{8}{100-9 }$
Kp=8.79%

3) cost of equity (Ke) = DPS / MPS
ke = 9.8 / 75
Ke = 13.0667%

WACC = (.4*7.92) + (0.10*8.79) + (0.5*13.0667)
WACC = 10.58035 %

I hope this clear your doubt.

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