Mini case #3- Project Analysis

Instructions:

Answer all 4 questions and submit answers through blackboard prior to the due date to receive full credit. You will receive 6 points for each correct answer, and 1 point for answering all 4 questions correctly, for a total of 25 points.

Case Narrative:

The firm's tax rate is 35%. The company has $2,000,000 in annual sales, and annual fixed expenses of $1,100,000 and $500,000 in variable expenses. There was an initial investment in the firm of $1,500,000, which will be depreciated straight-line over 10 years. The project is expected to last 10 years.

The firm has a Capital Structure as follows:

1.The market value of the bonds is $2,000,000.

2.The market value of the Preferred Stock is $1,000,000.

3.The market value of the Common stock is $7,000,000

4.The cost of the preferred stock is 4%, the cost of the common stock is 6%, the cost of the bonds is 8%.

1.What is the firm's WACC? __________________________________Chapter 13

2.What is the firm's OCF ______________________________________Chapter 9

3.What is the NPV, ___________________________________________Chapter 8

4.Based on your answer to question #3, will to accept or reject this project? What is the reasoning for accepting or rejecting the project?

___________________________________________________________Chapter 8