Caspers is analyzing a proposed expansion project that is much riskier than the firms current projects. Thus,

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Question:

Casper’s is analyzing a proposed expansion project that is much riskier than the firm’s current projects. Thus, the project will be assigned a discount rate equal to the firms cost of capital minus 2 percent. The proposed project has an initial cost of $80 million dollars that will depreciate on a straight-line basis over 10 years. The project also requires additional inventory of $500,000 over the projects life. Management estimates the facility will generate an operating cash flow (OCF) of $12 million a year over its 10-year life. After 10 years, the company plans to sell the facility for an estimated $8 million. The company has 100,000 shares of common stock outstanding at a market price of $100 a share. Next year, this stock will pay an annual dividend of $1.50 a share. The dividend is expected to increase by 3.5 percent annually. The firm also has 10,000 shares of 10 percent preferred stock with a market value of $90 a share. The preferred stock has a par value of $100. The company has a 7 percent, semiannual coupon bond issue outstanding with a total face value of $1.2 million. The bonds are currently priced at 95 percent of face value and mature in 8 years. The tax rate is 34 percent. What is the total value of Casper?

$12,040,000

$10,030,000

$8,020,000

$6,010,000

$4,000,000

calculate the appropriate cost of debt (rounded to the nearest tenth percent).

11.11 percent

5.17 percent

3.93 percent

10.34 percent

7.85 percent

Calculate this project’s WACC (rounded to the nearest tenth percent).

3.61 percent

4.61 percent

5.61 percent

6.61 percent

7.61 percent

Should the firm pursue the expansion project at this time? Why or why not?

		Yes, because the NPV is $12,787,952
		Yes, because the NPV is $22,787,952
		No, because the NPV is -$2,787,952
		No, because the NPV is -$12,787,952
		No, because the NPV is -$22,787,952