National Electric Company (NEC) is considering a $45.08 million project in its power systems division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that the project’s unlevered cash flows will be $3.18 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: Issuing 10-year bonds or issuing common stock. The company’s pretax cost of debt is 7.7 percent, and its cost of equity is 11.6 percent. The company’s target debt-to-value ratio is 80 percent. The project has the same risk as the company’s existing businesses, and it will support the same amount of debt. The tax rate is 34 percent. |
a. Calculate the weighted average cost of capital. |
b. Calculate the net present value of the project |
National Electric Company (NEC) is considering a $45.08 million project in its power systems division. Tom...
National Electric Company (NEC) is considering a $45.07 million project in its power systems division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that the project’s unlevered cash flows will be $3.18 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: Issuing 10-year bonds or issuing common stock. The company’s pretax cost of debt is 6.7 percent and its cost of equity is 11.5 percent. The company’s target...
National Electric Company (NEC) is considering a $45.13 million project in its power systems division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that the project’s unlevered cash flows will be $3.24 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: Issuing 10-year bonds or issuing common stock. The company’s pretax cost of debt is 7.3 percent and its cost of equity is 12.1 percent. The company’s target...
National Electric Company (NEC) is considering a $45.15 million project in its power systems division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that the project’s unlevered cash flows will be $3.31 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: Issuing 10-year bonds or issuing common stock. The company’s pretax cost of debt is 7.5 percent and its cost of equity is 12.3 percent. The company’s target...
National Electric Company (NEC) is considering a $45.07 million project in its power systems division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that the project’s unlevered cash flows will be $3.17 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: Issuing 10-year bonds or issuing common stock. The company’s pretax cost of debt is 7.6 percent, and its cost of equity is 11.5 percent. The company’s target...
National Electric Company (NEC) is considering a $45.03 million project in its power systems division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that the project’s unlevered cash flows will be $3.13 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: Issuing 10-year bonds or issuing common stock. The company’s pretax cost of debt is 7.2 percent, and its cost of equity is 11.1 percent. The company’s target...
NEC is considering a $45M project in its power systems division. The CFO estimates that the project’s unlevered cash flows will be $3.1M per year, in perpetuity. The CFO has devised two possibilities for raising the initial capital: Issuing 10-year bonds or issuing common stock. NEC’s pretax cost of debt is 6.9%, and its cost of equity is 10.8%. The company’s target debt-to-value ratio is 80%. The project has the same risk as NEC’s existing businesses, and it will support...
Company is considering a $97 million project in its power systems division. The company's chief financial officer, has evaluated the project and determined that the project's unlevered cash flows will be $3.76 million per year in perpetuity. The company's chief financial officer has devised two possibilities for raising the initial investment: Issuing 10-year bonds or issuing common stock. The company's pretax cost of debt is 8.2 percent, and its cost of equity is 13.5 percent. The company's target debt-to-value ratio...
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Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $2.9 million in anticipation of using it as a toxic dump site for waste chemicals, but it...