Panelli\'s is analyzing a project with an initial cost of $102,000 and cash infl

Question

Panelli's is analyzing a project with an initial cost of $102,000 and cash inflows of $65,000 in year one and $74,000 in year two. This project is an extension of the firm's current operations and thus is equally as risky as the current firm. The firm uses only debt and common stock to finance its operations and maintains a debt-equity ratio of 0.45. The aftertax cost of debt is 4.8 percent, the cost of equity is 12.7 percent, and the tax rate is 35 percent. What is the projected net present value of this projec

Explanation / Answer

plz rate this answer.................this helps you 1) Bonds 970,000 Preferred Stock 429,000 Common 870,000 Total 2,269,000 >>>Preferred = 18.9% 2) Part A: Debt to Equity Ratio - .35 Debt to 1.00 Equity. Total Capital - 35 + 100 = 135. Debt = 35 / 135, or 25.9%, Equity = 74.1% Debt - 8% x 67% = 5.36% after tax x 25.9% = 1.39% Equity - 11% x 74.1% = 8.15% >>>WACC = 1.39 + 8.15 = 9.54% Part B: Investment - 56,000 PV of Annuity of 35,000, for 2 periods, at 9.54% = 61,121 >>>NPV - 61,121 - 56,000, = 5,121 Positive

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