Question

Scanlin, Inc. is considering a project that will result in initial aftertax cash savings of $2.1 million at the end of the first year, and these savings will grow at a rate of 2 percent per year indefinitely. The firm has a target debut-equity ratio of 1.00, a cost of debt of 9.6 percent, and a beta of 1.50. The cost-saving proposal is closely related to the firm's core business, so it is viewed as having the same risk as the overall firm. Assume a 34 percent tax rate, return on the market of 8 percent, and the riskless return of 2 percent. Q1. What is the cost of equity? Round your answer to two decimal places. 6 pts. Q2. What is the WACC? Round your answer to two decimal places. 10 pts. Q3. To begin the project, the firm needs to invest $35 million. What is the project's NPV? Round your answer to two decimal places. 10 pts.

Answer 1

Cost of equity (Re) - Calculation of core of equity : cost of equity ckel & Ref B(Rm - Rr). Where Ri= risk free rate Rn market return. given Rf 27., Rm 87, B= 1.50 substitute values in formula then, of equity Cke)- 27+ 1.50 (87. – 27) cost of equity = 11% Calculation OF WACC in IAcc = 0 кка + Юo x Ke where wd = weight of debt Kd = cost of debt we = weight of equity ke - Cost of equity. Calculation of cost of debt : Assume given cost of debt is before tax then Cost of debt - Paterest rate (1- Taurate) given Interest rate = 9.6%, Tax rate = 347. Cost of debt a 9.6%. (1- 347.) 3 Colt of debt - 6.34%.

DADO Je 013 bey given debt-equity ratio 1. Weight of debt - or weigher of equity -0.5. = 0.5X6.34%. + 0,5 X 11.). Acc = 0.5X6.347. to WACC = 8.67.. Q3 calculation of Npvr cash out flows. red cash inflows - Calhflows year I end to discount PPPP CO MPV- sum or discounted cash inflows - ca giren Cashout flows - $35 million. Giren I year end cash inflows = $2.1 million. and a grows at 24. Andetinately. terminal e have to find Cash flows and attes that we have to discount year and terminal Cach flows to o year using WACE So terminal Cash flow - FCFF ke-g. Terminal Cashflow $2.1(1+0.02) - 8.677. – 27. $2.142 6.67%. - $32.11 million. not year end Cash flows after discounting = 82.1 million (1+0.0867) - - 193 So Total sum or discounted Calt inflows = $34.04. Then NPV = $34.04-135 (NPV -0.96. "The upy is neglive, it is not a acceptable project X 1