Hello,

Unfortunately, I am very stuck on this massive assignment concerning ATWACOC and NPV. I can attach the doc showing how far I have been able to proceed.

Thank you in advance for any assistance that you could provide!

Stephanie

Integrative Capital Budgeting Problem

Your corporation has the following balance sheet.

SecurityBookPrice perUnitsCoupon

ClassValueShareOutstandingRateMaturity

Bonds$50mm$100050,0007%10 yrs.

Debentures$30 mm$95030,0008%20 yrs.

Preferred Stock$40 mm$90400,00012%

Common Stock$50 mm$504,000,000

Retained Earnings$75 mm

Assume that the beta of the common stock is 1.75, the risk free rate is 4% and the market premium (i.e., E(R_m) - R _f) is 9%.Assume a tax rate of 40%, the par value of debt securities is $1,000 and the par value of preferred stock is $100.

1.Determine the ATWACOC.

Security

Book

Price per

Units

Coupon

Class

Value

Share

Outstanding

Rate

Maturity

Cost of Debt

Cost of Debt

Bonds

$50,000,000

$1,000

50,000

7%

10 yrs.

=((1000*.07*(1-.40)/1000))

4.20%

Debentures

$30,000,000

$950

30,000

8%

20 yrs.

=((950*.08*(1-.40/950))

4.80%

Preferred Stock

$40,000,000

$90

400,000

12%

=90*.12/90

12%

Common Stock

$50,000,000

$50

4,000,000

=((.04+1.75*.09))

19.75%

Retained Earnings

$75,000,000

19.75%

WACC = 50*.042+30*.048+60*.12+50.1975+75*.1975 = 35.43

2.The firm in is considering purchasing new equipment.The initial investment is $5 million.The equipment will increase cash flows for one of the divisions of the firm by 10% each year until year 10. In year 1, the cash flow is $10 million. Assume that after year 10, the cash flow will decline back to $10 million unless a new investment is made.Calculate the NPV and the IRR of the project.Should the firm make the investment? Why or why not?

A

B

Initial Investment

($5,000,000)

($10,000,000)

Cost of Cap

10%

Yrs

Cash Inflows

0

1

2

3

4

5

6

7

8

9

10