Mini Case #3

INTRUCTIONS: Answer all 4 questions. Assignment should be submitted in Blackboard by the due date. This is a 30 point assignment seven (7) points for each correct answer and 2 point for answering all 4 questions.

Partial credit will be given if you give the wrong answer but show the correct formula.

A firm has the following capital structure:

1. Bonds with market value of $4,000,000
2. Preferred Stock with a market value of $1,500,000
3. Common stock, of which 300,000 shares is outstanding. Presently, each common stock is selling at $20 per share

The preferred stock price per share is $60 and pays a $7 dividend. Common stock shares sell for $20 and pay a $2 dividend. Dividends for common stock are expected to grow by 3%. Bond price is $950, and the bond coupon rate is 6.5%. The bonds mature in 7 years.

The firms tax rate is 38%. The company has $5,000,000 in sales, and expenses of $3,800,000. The initial investment of $5,500,000 will be depreciated straight-line over 10 years. The project is expected to last 10 years.

1. What is the firms Weighted Average Cost of Capital (WACC)?

_____________________ (Chapter 13)

2. What is the firms Operating Cash Flow (OCF)?

______________________ (Chapter 9)

3. Using the WACC is the NPV, using the WACC (use the answer from question 1 above), and OCF (use the answer from question 2 above)?

______________________ (Chapter 8)

4. Based on your answer to question #3, would you accept or reject the project? Explain why?

_______________________________________________________Chapter 8