The firm has issued 2000 preferred stocks which pay a stated annual dividend of $6 per...

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The firm has issued 2000 preferred stocks which pay a stated annual dividend of $6 per share. The preferred stocks are currently selling for $120. Additionally, the firm has 1000 corporate bonds and the bond is selling for $1,050 along with a yield to maturity of 6%. Also, the firm has 4000 outstanding shares of common stock selling for $50 per share. The common stocks have a beta of 1.5. The market risk premium is 5% and risk-free rate is 2%. The firm is subject to corporate tax rate 25 percent. The firm is considering to launch a new project that is as risky as the overall firm. The project needs to make an initial investment of $500,000. The project will save the firm $200,000 per year in pretax operating costs over the 3-year life of the project. It will also need to make an initial investment of $50,000 in working capital which will be recovered at the end of the project. The project will be depreciated based on the three-year MACRS class (25%, 35%, 23%, and 17% respectively for years 1- 4) and will be scrapped for $85,000 at the end of its useful life. a) What are the weights of each capital component in the firm's capital structure? b) What is the cost of each capital component in the firm's capital structure? c) What is the overall cost of capital to the firm? d) Should the firm accept the project based on the NPV analysis? The firm has issued 2000 preferred stocks which pay a stated annual dividend of $6 per share. The preferred stocks are currently selling for $120. Additionally, the firm has 1000 corporate bonds and the bond is selling for $1,050 along with a yield to maturity of 6%. Also, the firm has 4000 outstanding shares of common stock selling for $50 per share. The common stocks have a beta of 1.5. The market risk premium is 5% and risk-free rate is 2%. The firm is subject to corporate tax rate 25 percent. The firm is considering to launch a new project that is as risky as the overall firm. The project needs to make an initial investment of $500,000. The project will save the firm $200,000 per year in pretax operating costs over the 3-year life of the project. It will also need to make an initial investment of $50,000 in working capital which will be recovered at the end of the project. The project will be depreciated based on the three-year MACRS class (25%, 35%, 23%, and 17% respectively for years 1- 4) and will be scrapped for $85,000 at the end of its useful life. a) What are the weights of each capital component in the firm's capital structure? b) What is the cost of each capital component in the firm's capital structure? c) What is the overall cost of capital to the firm? d) Should the firm accept the project based on the NPV analysis?

Answer rating: 100% (QA)

SOLUTION To calculate the weights and costs of each capital component in the firms capital structure we need to consider the values of preferred stocks corporate bonds and common stocks a Weights of e... View the full answer