The capital structure of Jack\'s Constructiom n at par ielding on storent has 10

Question

The capital structure of Jack's Constructiom n at par ielding on storent has 100,000 bonds outstanding that are seritics are ofcomi 25 p Co. consists of debt and equity. The firm percent. The company also million shares of common stock outstanding. The The return on U.S. Treasury bills is 4 stock has a beta of 1.5 and sells for $30 a share:t. Jack's Similar re selling at par value. The par value of each bond as 10 milli percent and the market rate of return is Jack's weighted or $30 b) Jack 0 percent. Jack's tax rate is 25 percent. What is average cost of capital? is considering a five-year project that is expec cash flows,ear project that is expected to generate the following net (or Year Net (or total) after-tax cash flow $1,000,000 3,000,000 4,000,000 6,000,000 7,000,000 2 The initial investment of the project is $12,000,000. The project has no net work capital requirement and no salvalge value. Assume that the project has the same ris the firm overall. Find the net present value (NPV) of the project.

Explanation / Answer

a) Weighted average cost of capital = 8(1-0.25)* 100000/10100000 + {10+1.5(10-4) }*10000000/10100000 = 18.87%

b) NPV = Present Value of Cash inflows - Cash Outflows

1000000*0.841 + 3000000*0.707 + 4000000*0.595 + 6000000*0.5008 + 7000000*0.421 - 12000000 = - 706200

Therefore NPV = $(-) 706200

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