Malt Ltd is considering a new project that will require equipment costing $2,000,000. The company believes...

 

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Malt Ltd is considering a new project that will require equipment costing $2,000,000. The company believes the project will generate after-tax cash flows of $350,000 per year forever, with the first cash flow starting at the end of the first year. Malt Ltd will raise $400,000 by a new issue of 5-year bonds with face value of $1,000 and a yield to maturity of 6.25% pa (the flotation costs of the new debt would be 2.5% of the amount raised), and $1,600,000 by a new issue of ordinary shares (the flotation costs of the new share issue would be 10% of the amount raised). Malt Ltd has a beta of 1.75, the risk-free rate is 2.5% pa and the market risk premium is 7% pa. The company tax rate is 30%. Calculate the net present value (NPV) of the new project. Explain if the company should accept this project or not. (Show answer in dollars, correct to 2 decimal places.) (Hint: follow these steps: first calculate Malt's weighted average flotation cost of the new fund raising, then calculate true cost of the project, then calculate WACC and then NPV of the project) 10 marks Malt Ltd is considering a new project that will require equipment costing $2,000,000. The company believes the project will generate after-tax cash flows of $350,000 per year forever, with the first cash flow starting at the end of the first year. Malt Ltd will raise $400,000 by a new issue of 5-year bonds with face value of $1,000 and a yield to maturity of 6.25% pa (the flotation costs of the new debt would be 2.5% of the amount raised), and $1,600,000 by a new issue of ordinary shares (the flotation costs of the new share issue would be 10% of the amount raised). Malt Ltd has a beta of 1.75, the risk-free rate is 2.5% pa and the market risk premium is 7% pa. The company tax rate is 30%. Calculate the net present value (NPV) of the new project. Explain if the company should accept this project or not. (Show answer in dollars, correct to 2 decimal places.) (Hint: follow these steps: first calculate Malt's weighted average flotation cost of the new fund raising, then calculate true cost of the project, then calculate WACC and then NPV of the project) 10 marks

Answer rating: 100% (QA)

To calculate the net present value NPV of the new project we need to follow these steps 1 Calculate ... View the full answer