THANK YOU! Stackhouse Industries has a new project available that requires an in
ID: 2648897 • Letter: T
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THANK YOU!
Stackhouse Industries has a new project available that requires an initial investment of $4.5 million. The project will provide unlevered cash flows of $675,000 per year for the next 20 years. The company will finance the project with a debt-to-value ratio of .40. The company's bonds have a YTM of 6.8 percent. The companies with operations comparable to this project have unlevered betas of 1.15, 1.08, 1.30, and 1.25. The risk-free rate is 3.8 percent, and the market risk premium is 7 percent. The company has a tax rate of 34 percent. What is the NPV of this project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))Explanation / Answer
Calulation of NPV Year Amount PVF (9.0942%) PV Initial invetsment 0 -4500000 1 $ (4,500,000.00) Annula cash flows 1 to 20 675000 9.06760 $ 6,120,627.72 NPV (Sum of PVs) $ 1,620,627.72 Calculation of WACC (Discount rate ) Cost of Debt = 6.8%(1-0.34) = 4.488% Cost of equity = RF + Beta * MRP RF = Risk free rate = 3.8% Beta = Avergae beta =(1.15+1.08+1.3+1.25) / 4 = 1.195 MPR = Market risk premium =7% Cost of equity = 3.8% + 1.195 * 7% = 12.165% WACC = Cost of Equity * weight of equity + Cost of debt * weight of debt = (12.165 * 0.60 )+ (4.488 *0.40) 9.0942 %
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