Question

What is Odarian's weighted average cost of capital?

Use the NPV function in Excel to find the project's NPV? Should Odarian open the coffee s
hop? Explain.

3. Consider the following information for Odarian, Inc. Odarian's target capital structure is 38% long-term debt, 15% preferred stock and 67% equity. The firm has one outstanding 8.03% bond issue that matures on November 7, 2039 makes semiannual payments, and currently sells for $851 per bond. Assume that November 7, 2019, is the settlement date for the bond issue. • Odarian's preferred stock pays an annual dividend of $2.37 and currently sells for $1.29 o The company's common stock's returns have a covariance of 0.00359824709 with the market's returns. The variance of the market's returns is 0.001883899. The market risk premium is 11.48 percent, and the risk free rate of return is 1.87 percent . The company's marginal tax rate is 22%. a. What is Odarian's weighted average cost of capital? b. Odarian operates coffee shops nationwide and plans to open a shop in Oregon. The table below contains the cash flow analysis for this expansion. Year 0 1 2 3 4 Cash Flow -$3,500,000 $1,000,000 $2,000,000 $1,400,000 $1,000,000 Use the NPVO function in Excel to find the project's NPV? Should Odarian open the coffee shop? Explain.

Answer 1

New Microsoft Office Excel Worksheet - Microsoft Excel Page Layout Formulas Data Review View 9- Home Insert * Cut La Copy Paste Format Painter Clipboard 13426 - Dr Percentage D :- 3 Wrap Text Merge & Center AutoSum" A Calibri - 11 - A A BI U PA Font fac =RATE(40,40.15,-851,1000,0) Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles 2 Clear Sort & Filter Editing Find & Select Alignment Number Cells H L M N O P Q R S T cost of preferred stock = preferred dividend/market price 3424 2.37/27.25 8.70% 3425 rate(nper,pmt,pv,fv, ty pe) nper=20*2 =40 pmt = 1000*8.03% 1/2 -40.15 pv =- 851 fv = RATE(40,40.15,- semiannual befor 1000 type =0 851,1000,0) annual after tax cc 2*4.87*(1-.22) 7.60 4.87% 3426 3427 3428 risk free rate+(market cost of common st risk premium)*beta 3429 1.87+(11.48)*1.91 23.80 beta = covariance of asset return/variance of market .00359824709/.00188389 1.91 3430 3431 3432 3433 3434 3435 3436 WACC source weight debt preferred stock common stock Sheet23 Sheet24 Sheet25 component cost weight *component cost 38% 7.60% 2.88800% 15% 8.70% 1.30500% 47% 23.80% 11.18600% Sheet26 Sheet27 Sheet28 Sheet29 Sheet22

Corso- AutoSum - A Eg Copy Insert Delete Format Cell Styles 2 Clear Sort & Filter Editing Find & Select Cells New Microsoft Office Excel Worksheet - Microsoft Excel Home Insert Page Layout Formulas Data Review View * Cut Calibri 11 - A A Dr Wrap Text Number Paste BI U PA Format Painter Merge & Center - $ - % Conditional Format , Formatting as Table Clipboard Font Alignment Number Styles H3442 - f =NPV(15.38%, H3441:K3441)+G3441 F M annual after tax cc 2*4.87*(1-.22) 7.60 3428 risk free rate+market cost of common st risk premium)*beta 1.87+(11.48) *1.91 23.80 N O P Q R S T 3427 3429 beta = covariance of asset return/variance of market .00359824709/.00188389 1.91 3430 3431 3432 3433 3434 3435 3436 3437 3438 3439 3440 3441 WACC source weight debt 38% preferred stock 15% common stock 47% total 100% WACC = sum of weight*component cost component cost weight *component cost 7.60% 2.88800% 8.70% 1.30500% 23.80% 11.18600% 15.38% 1000000 2000000 1400000 1000000 year cash flow -3500000 net present value = Using NPV function in MS NPV(15.38%,H3441:K34 excel 41)+G3441 344759.44) 3442 3443 Sheet22 Sheet23 Sheet24 Sheet25 Sheet26 Sheet27 Sheet28 Sheet29

cost of preferred stock = preferred dividend/market price	2.37/27.25	8.70%
semiannual before tax cost of debt =Using rate function in MS excel	rate(nper,pmt,pv,fv,type) nper =20*2 =40 pmt = 1000*8.03%*1/2 =40.15 pv =- 851 fv = 1000 type =0	RATE(40,40.15,-851,1000,0)	4.87%
annual after tax cost of debt	2*4.87*(1-.22)	7.60
cost of common stock	risk free rate+(market risk premium)*beta	1.87+(11.48)*1.91	23.80
beta = covariance of asset return/variance of market	.00359824709/.001883899	1.91
WACC
source	weight	component cost	weight *component cost
debt	38%	7.60%	2.88800%
preferred stock	15%	8.70%	1.30500%
common stock	47%	23.80%	11.18600%
total	100%
WACC = sum of weight*component cost			15.38%
year	0	1	2	3	4
cash flow	-3500000	1000000	2000000	1400000	1000000
net present value = Using NPV function in MS excel	NPV(15.38%,H3441:K3441)+G3441	344759.44
NPV of the project is positive so it should be implemented