WACC Comprehensive A company has a proposed 2-year project with the cash flows s
ID: 2721326 • Letter: W
Question
WACC Comprehensive
A company has a proposed 2-year project with the cash flows shown below and would like to calculate the NPV of this project so that they can decide whether to pursue the project or not. The company has a target capital structure of 60% equity and 40% debt. The beta for this firms stock is 1.2, the risk-free rate is 4.7, and the expected market risk premium is 6.3%. The bonds for this company pay interest semiannually and have a coupon interest rate of 5%, 18 years to maturity, a face value of $1,000, and a current price of 1,140.97. If the corporate tax rate is 35%, what is the NPV of the proposed project for this firm?
The correct answer is 2,252. Show step by step how I arrive at the answer 2,252.
Pleas don't post an answer that is not 2,252 because it is not right. The teacher gave me the answer of 2,252 so it is correct!
Explanation / Answer
Cost of equity Ke = Rf + MRP x beta
= 0.047 + 0.063 x 1.20
= 12.26%
Cost of debt = Rd x (1-t)
= 3.90% x( 1- 0.35)
= 2.54%
WACC = Ke x We + kd x Wd
= 0.1226 x 0.60 + 0.0254 x 0.40
= 8.37%
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