Question

HLINE Corp has a target capital structure of 30% debt and 70% equity. It has $300 million in bonds outstanding with a yield of 8% and 50 million shares of stock outstanding with a current market price of $14.00 per share. The company's beta is 1.25 and the risk-free rate of interest is 4% with a market risk premium of 6%. The firm has a tax rate of 25%. The company is looking to raise $250 million to build a second factory. The new factory will increase output substantially. The table below shows the anticipated cash flows generated from the new factory including a salvage value in year 5. What is the NPV of this project? Year Cash Flow (Smill) -250 35 $3787 $33.73 milion $40.66 million $29.54 million

Answer 1

In order to calculate NPV of the project we need to calculate weighted Average cost of capital (WACC) for the company. calculation of WACC Cost Of Debt Ckd) = Yield (l- Tax Rate) = 8% (1-0.25) = 6% Cost of Equity (ke) Current Price of Share = $14,00 Beta (B) = 1.25 Risk free Return (Rp) = 4% Market Risk Premium CRM-Rf) = 6% ke = Rft (Rm - Rf) x B = 4%. + 6% x 1.25 = 11.50%. WACC source Equity Debt cost of source 11.50% 6% © Proportion 70% 30% Ⓡx©) Product 8.05% 1.80% 9.85% Pa. D

To calculate NPV WACC used will be 9.85%. Calculation of NPV Year lin Mn$) Inflow 35 95 95 125 Discounting Present [email protected]% value 0.9103 31.86 0.8287 78.73 0.7544 71.67 0.6868 85.85 0.6252 15.63 283.74 (250.00) 33.74 25 Present Value of Inflows o Present Value of outflows Net Present value 3. NPV can be considered to be 33.73 Millions Pg. @