Company WHITE INDUSTRIES Corp has 1,300,000 of debt outstanding that is selling at 106 percent of...
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Company WHITE INDUSTRIES Corp has £1,300,000 of debt outstanding that is selling at 106 percent of par that has a yield to maturity of 6.2 percent. The firm also has 55,000 shares of common stock outstanding. The stock has a beta of 1.6 and sells for £45 a share. The risk-free rate is 3 percent, the market risk premium is 4 percent, and the firm's tax rate is 24 percent, and all interest is tax deductible. What is the firm's weighted average cost of capital? Now is the beginning of Year 1. The firm is considering a project that has the same risk level as the firm's current operations, an initial cost of £450,000 right at the beginning of Year 1, and a cash inflow of £70,000 at the end of each year from the end of Year 2 until the end of Year 12. Additionally, at the beginning of Year 15 the firm will have a project abandonment cost of £100,000. What is the Net Present Value (NPV) of the project? Explain whether you would invest in this project. Under which conditions would you invest? Also explain the impact in this project's viability of a 5-percentage point increase in the firms' tax rate (occurring in the beginning of the project)? Present a definition of NPV and explain its relevance (Use a maximum of 200 words). Company WHITE INDUSTRIES Corp has £1,300,000 of debt outstanding that is selling at 106 percent of par that has a yield to maturity of 6.2 percent. The firm also has 55,000 shares of common stock outstanding. The stock has a beta of 1.6 and sells for £45 a share. The risk-free rate is 3 percent, the market risk premium is 4 percent, and the firm's tax rate is 24 percent, and all interest is tax deductible. What is the firm's weighted average cost of capital? Now is the beginning of Year 1. The firm is considering a project that has the same risk level as the firm's current operations, an initial cost of £450,000 right at the beginning of Year 1, and a cash inflow of £70,000 at the end of each year from the end of Year 2 until the end of Year 12. Additionally, at the beginning of Year 15 the firm will have a project abandonment cost of £100,000. What is the Net Present Value (NPV) of the project? Explain whether you would invest in this project. Under which conditions would you invest? Also explain the impact in this project's viability of a 5-percentage point increase in the firms' tax rate (occurring in the beginning of the project)? Present a definition of NPV and explain its relevance (Use a maximum of 200 words).
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Answer rating: 100% (QA)
SOLUTION To calculate the weighted average cost of capital WACC we need to find the cost of debt and the cost of equity and then weight them based on ... View the full answer
Related Book For
Finance Applications and Theory
ISBN: 978-0077861681
3rd edition
Authors: Marcia Cornett, Troy Adair
Posted Date:
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