Jessie starts up a project on automoibles that costs $150,000. She will finance $120,000 of it...

 

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Jessie starts up a project on automoibles that costs $150,000. She will finance $120,000 of it by issuing stocks and bonds, and borrow the rest with a loan at an APR of 8.8% with monthly payments and an upfront cost of $5,000. Specifically, she will finance 40% of $120,000 by stocks and the rest by bonds. The issuing price for stocks is $400 per share with semi-annual dividend payment of 6.5% of the stock price. Jessie plans to purchase back 57% of the stocks after two years (right after the dividend payment) and the stock price is expected to be 1.5 times of the original price at the end of the two years. For the bonds, she plans to issue a two-year bond with quarterly coupon payments. The bond price is $540 with a face value of $620 and an annual coupon rate of 10%. The project will earn Jessie a net income of $2,850 per month at the end of each month and she plans to sell the project at a price of $180,000 after two years. She currently has a loan of $10,000 that matures in one year at a rate of 4% EAR with monthly payments. She will use the proceeds and the money raised in this project to pay for this loan. Then, what is the IRR of her investment on this automobile project? (Show working) Jessie starts up a project on automoibles that costs $150,000. She will finance $120,000 of it by issuing stocks and bonds, and borrow the rest with a loan at an APR of 8.8% with monthly payments and an upfront cost of $5,000. Specifically, she will finance 40% of $120,000 by stocks and the rest by bonds. The issuing price for stocks is $400 per share with semi-annual dividend payment of 6.5% of the stock price. Jessie plans to purchase back 57% of the stocks after two years (right after the dividend payment) and the stock price is expected to be 1.5 times of the original price at the end of the two years. For the bonds, she plans to issue a two-year bond with quarterly coupon payments. The bond price is $540 with a face value of $620 and an annual coupon rate of 10%. The project will earn Jessie a net income of $2,850 per month at the end of each month and she plans to sell the project at a price of $180,000 after two years. She currently has a loan of $10,000 that matures in one year at a rate of 4% EAR with monthly payments. She will use the proceeds and the money raised in this project to pay for this loan. Then, what is the IRR of her investment on this automobile project? (Show working)

Answer rating: 100% (QA)

To calculate the internal rate of return IRR of Jessies investment we need to determine the cash inf... View the full answer