A project generates net (after-tax) cash flows of $20 million every year for 4 years. The investment is $43 million. The tax rate is 40%. The firm has a target debt ratio of 40%. Out of total equity, they will use $6,000,000 in preferred stock and the rest will be from retained earnings.

• The firm’s current bonds have 5 years left to maturity, a coupon rate of 7% with annual coupons, a face value of $1000 and currently trade for $960. The before-tax cost on any new bonds will be the same as the yield to maturity on the current bonds.

• Preferred stock has a dividend of $4 with a price of $42. Issue costs on preferred stock are $2.

• To estimate the cost of retained earnings, the firm uses a beta of 1.3 with a risk-free rate of 4% and a market risk premium of 10%.

Use the weighted average cost of capital (WACC) to find the net present value (NPV) of the project. For the WACC, carry work out to 4 decimal points.

Answer rating: 100% (QA)

Weighted Average Cost of Capital WACC Where Re cost of equity Rd cost of debt E market value of the ... View the full answer