Capital Structure Debt 40% Interest rate 5% Tax Rate 26% Equity 60% Risk Free rate 6% RM
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Question:
Capital Structure | |||
Debt | 40% | ||
Interest rate | 5% | ||
Tax Rate | 26% | ||
Equity | 60% | ||
Risk Free rate | 6% | ||
RM | 13% | ||
Beta | 1% | ||
Working capital | 10% next year's sales | ||
No terminal cash flows | |||
Project 1 | Capital investment | 1,000,000 | |
Year | Revenues | Expenses | |
1 | 850,000 | 680,000 | |
2 | 871,250 | 697,000 | |
3 | 893,031 | 714,425 | |
4 | 915,357 | 732,286 | |
5 | 938,241 | 750,593 | |
6 | 961,697 | 769,358 | |
7 | 985,739 | 788,592 | |
8 | 1,010,383 | 808,306 | |
Instructions | |||
a) Compute the cost of debt financing | |||
b) Compute the cost of equity financing using the capital asset pricing model (CAPM) | |||
c) Compute the waighted average cost of capital (WACC) | |||
N.B. The capital investment is to be depreciatded as a 7 years asset | |||
d) Evaluate the project by computing: 1) Net Present Value (NPV) 2) Internal rate of return 3) Payback | |||
e) Decision is to accept or reject the projet (based on IRR and NPV) | |||
Look also at the effects of tax
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-0133400694
1st canadian edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford, David A. Stangeland, Andras Marosi
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