Capital Structure
Debt	40%
Interest rate	5%
Tax Rate	26%
Equity	60%
Risk Free rate	6%
RM	13%
Beta	1%
Working capital	10% next year's sales
No terminal cash flows
Project 1	Capital investment	1,000,000
Year	Revenues	Expenses
1	850,000	680,000
2	871,250	697,000
3	893,031	714,425
4	915,357	732,286
5	938,241	750,593
6	961,697	769,358
7	985,739	788,592
8	1,010,383	808,306
Instructions
a) Compute the cost of debt financing
b) Compute the cost of equity financing using the capital asset pricing model (CAPM)
c) Compute the waighted average cost of capital (WACC)
N.B. The capital investment is to be depreciatded as a 7 years asset
d) Evaluate the project by computing: 1) Net Present Value (NPV) 2) Internal rate of return 3) Payback
e) Decision is to accept or reject the projet (based on IRR and NPV)

Look also at the effects of tax

Answer rating: 100% (QA)

To solve this problem well follow these steps a Compute the cost of debt financing b Compute the cost of equity financing using the Capital Asset Pric... View the full answer