Wind, Inc. is considering a scale-expanding investment of $42 million. The investment is expected to generate an
Question:
Wind, Inc. is considering a scale-expanding investment of $42 million. The investment is expected to generate an EBITDA of $13.63 million per year for five years. The investment would be depreciated straight-line over that same time period. The company tax rate is 35 percent. The company has bonds outstanding with the total market value of $55 million and a yield to maturity of 6.5 percent. The company also has 4.5 million shares of common stock outstanding, which are selling at a share price of $25. The company’s CEO considers the firms current debt – equity ratio optimal. Easy-Breeze, LLC is a publicly traded all-equity competitor with a ß of .7892. The expected market risk premium is 7.5 percent. Treasury bills are currently priced at 3.4 percent.
• Use the weighted average cost of capital approach to determine Mighty Wind should make the investment.
• Suppose the company decides to fund this investment entirely with debt.
Determine the appropriate cost of capital; explain.
Fundamental Managerial Accounting Concepts
ISBN: 978-0078110894
6th Edition
Authors: Edmonds, Tsay, olds