A company has a target debt-equity ratio of 1:1. It is considering a project requiring Rs. 75 lakhs investment at the beginning. The project is expected to generate post tax cash flows of Rs. 10 lakhs every year for the next 10 years. The firm is considering financing this project using fresh issue of equity and debt in the target debt-equity ratio. The fresh equity has a cost of 20% with floatation costs of 8%. The debt carries a cost of 8% (post-tax) with floatation cost of 2%.

i) What is WACC? (Ignore the floatation costs in computing WACC)

ii) What is the NPV of the project if floatation cost is adjusted to the initial investment?

iii) Should the project

Answer rating: 100% (QA)

i WACC is the weighted average cost of capital It is the rate that a company expects to pay to all o... View the full answer