assignment 2.

QUESTION 2

1. Golem Corp. is planning a $30 million expansion to be financed with debt and common stock. The target capital structure is 25% debt and the rest is from equity. The tax rate is 20%.

   • Bonds: They have bonds with a yield to maturity of 4.28%.
   • Golem has a current dividend of $2.40. The retention rate is 40% and the return on equity is 15%. The price of common stock is $40 per share.

   a) Calculate the weighted average cost of capital. Carry work out to 4 decimal places (so your answer is either .xxxx OR xx.xx%)

   b) The expansion is expected to produce cash flows of $14.8 million every year for the next 3 years. Use the WACC to find the net present value.

   c) Should they expand? Explain.