Question

**THIS QUESTION HAS 4 PARTS TOTAL**

McCann Catching, Inc. has 2.00 million shares of stock outstanding. The stock currently sells for $12.90 per share. The firm's debt is publicly traded and was recently quoted at 90.00% of face value. It has a total face value of $20.00 million, and it is currently priced to yield 10.00%. The risk free rate is 3.00% and the market risk premium is 8.00%. You've estimated that the firm has a beta of 1.33. The corporate tax rate is 36.00%. The firm is considering a $46.58 million expansion of their production facility. The project has the same risk as the firm overall and will earn $11.00 million per year for 8.00 years. What is the cost of equity? Submit Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

1. What is the cost of equity?

2. What is the percentage of equity used by McCann Catching, Inc.?

3. What is the WACC for McCann Catching, Inc.?

4. What is the NPV of the expansion? (answer in terms of millions, so 1,000,000 would be 1.0000)

Answer 1

Equity Market Value = 2,000,000 * 12.87 = 25,740,000

Debt Market Value = 16,000,000 * 89% = 14,240,000

Toal Capital = 25,740,000 + 14,240,000 = 39,980,000

Cost of Equity = Rf + beta * Market Risk Premium

= 4% + 1.49 * 8%

= 15.92%

WACC = (Cost of Equity * Weight of Equity) + (Cost of Debt after tax * Weight of Debt)

= 15.92% * 25,740,000 / 39,980,000 + 10% * (1-0.38) * 14,240,000 / 39,980,000

= 12.46%

NPV = Present Value of Cash Inflow - Initial Outlay

= Annual Earnigns * PVAF (12.46%, 8 years) - 47,380,000

= 11,000,000 mn * 4.8880637914 - 47,380,000

= 6,396,870