FINA Company's assets are $750 million, financed through bank loans, bonds, preferred stocks, and common stocks....

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FINA Companys assets are $750 million, financed through bank loans, bonds, preferred stocks, and common stocks. The amounts

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Answer 1

Answer #1

Part A) WACC

Weight of bank loan= 100 / 750 = 0.1333

Weight of Bonds= 280 / 750 = 0.3733

Weight of preferred shares = 120 / 750 = 0.16

Weight of common stock = 250 / 750 = 0.3333

Cost of preferred stock = dividend / price - floatation cost

= 15 / 220 - 20

= 15 / 200

= 0.075 or 7.5%

Common stock = risk free rate + beta (market return - risk free rate)

= 5% + 3.20 (10% - 5%)

= 5% + 3.20 (5%)

= 5% + 16%

= 21%

After tax cost of bank loan= 3% (1 - 0.20)

= 3% (0.8)

= 2.4%

Cost of debt

Using financial calculator to calculate the cost of debt

Inputs: N= 10 × 2 = 20 (semiannual)

Pv= 970 - 20 = -950

Pmt= 8% / 2 × 1,000 = 40

Fv= 1,000

I/y= compute

We get, ytm of the bond as 4.38% × 2 = 8.76%

After tax cost of debt = 8.76% (1-0.20)

= 8.76% (0.8)

= 7.01%

WACC= weight of bank loan × after tax cost of bank loan + weight of bond × after tax cost of bond + weight of preferred stock × cost of preferred stock + weight of common shares × cost of common shares

= 0.1333 × 2.4% + 0.3733 × 7.01% + 0.16 × 7.5% + 0.3333 × 21%

= 0.32% + 2.62% + 1.2% + 7%

= 11.14%

Part B) NPV

Using financial calculator to calculate the Npv

Inputs: C0= -700,000

C1= 148,000. Frequency= 4

C2= 253,000. Frequency= 1

I = 11.14%

Npv= compute

We get, NPV as -$93,007.24

Paet C) IRR

Using financial calculator to calculate the IRR

Inputs: C0= -700,000

C1= 148,000. Frequency= 4

C2= 253,000. Frequency= 1

Irr= compute

We get, the IRR as 6.092%

As the NPV of the project is negative and IRR is less than the WACC , FINA should not accept the project.

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FINA Company's assets are $750 million, financed through bank loans, bonds, preferred stocks, and common stocks....

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