The R-Bar-M Ranch in Montana would like a new mechanized barn, which will require a $600,000 initial

Question:

The R-Bar-M Ranch in Montana would like a new mechanized barn, which will require a $600,000 initial cash outlay. The barn is expected to provide after-tax annual cash savings of $90,000 indefinitely (for practical purposes of computation, forever). The ranch, which is incorporated and has a public market for its stock, has a weighted average of 14.5 percent. For this project, Mark O. Witz, the president, intends to pro-vide $200,000 from a new debt issue and another $200,000 from a new issue of common stock. The balance of the financing would be provided internally by retaining earnings.
The present value of the after-tax flotation costs on the debt issue amount to 2 percent of the total debt raised, whereas flotation costs on the new issue come to 15 percent of the issue. What is the of the project after allowance for flotation costs? Should the ranch invest in the new barn?
Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...