B. If the firm is evaluating a new investment project that has the same risk as...

Transcribed Image Text:

B. If the firm is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? Hint: the firm's WACC is the appropriate discount rate. Compute Hankins' WACC: 1. What is the cost of equity using CAPM? 2. If the YTM of the bonds is 5.93%, and YTM represents the cost of debt, what is the after-tax cost of this debt? 3. What is the cost of the firm's preferred stock? 4. Based on this information, what is the WACC for Hankins Corporation? Key financial data for Hankins Corporation: Common stock outstanding = 5.4 million shares; market value = $64/share; beta = 1.13 5.6% Preferred stock outstanding = 290,000 shares issued with par value = $100 each. Current market value of preferred stock = $103/share. 6.7% semi-annual bonds outstanding = 125,000 bonds issued with par value = $1,000 each; market value is 109% of par; all bonds mature in 20 years. Market risk premium = 6.8% T-bills current yield = 4.3% Corporate tax rate = 34% B. If the firm is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? Hint: the firm's WACC is the appropriate discount rate. Compute Hankins' WACC: 1. What is the cost of equity using CAPM? 2. If the YTM of the bonds is 5.93%, and YTM represents the cost of debt, what is the after-tax cost of this debt? 3. What is the cost of the firm's preferred stock? 4. Based on this information, what is the WACC for Hankins Corporation? Key financial data for Hankins Corporation: Common stock outstanding = 5.4 million shares; market value = $64/share; beta = 1.13 5.6% Preferred stock outstanding = 290,000 shares issued with par value = $100 each. Current market value of preferred stock = $103/share. 6.7% semi-annual bonds outstanding = 125,000 bonds issued with par value = $1,000 each; market value is 109% of par; all bonds mature in 20 years. Market risk premium = 6.8% T-bills current yield = 4.3% Corporate tax rate = 34%