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

Answer rating: 100% (QA)

a Weighted Average Cost of Capital WACC 1 Calculate the cost of debt ... View the full answer