Is it better for a company to have a lower or higher WACC (cost of capital) for
Question:
Is it better for a company to have a lower or higher WACC (cost of capital) for its projects? Why? What issues might arise if the WACC used by the company is lower than it should be?
You are considering investing in ANZ shares in the future. The required rate of return on this share is 20 % and it has just paid a dividend of $1.33. Dividends are expected to grow at a constant rate of 5 per cent. What is the expected price of the share 3 years from now?
A beauty product company is developing a new fragrance product named Scent Forever. The company has already invested $30,000 in researching whether there is market demand for this product. To start producing the new product they will need to spend $10,000,000 today. The additional yearly sales of Scent Forever are expected to be 450,000 bottles for the next 5 years starting at the end of year 1, which will sell at a price of $80 dollars each and the variable cost is expected to be $30 per bottle. Fixed production costs resulting from the new product will be $1 million per year, and depreciation costs associated with the new product are $1.2 million per year. If the company goes ahead with the new product this will reduce the revenues of its existing fragrances by $13,770,000 per year. Working capital for the new product is an outlay of $2,000,000 today which will be recovered at the end of year 5. Assume that the tax rate is 30 percent and the cost of capital is 10%.
What are the Free Cash Flows for this project and what is the NPV of this project? (use the table below to compute)