Trivoli Company uses preferred Shares, Common Shares, and Debt to finance its pr

Question

Trivoli Company uses preferred Shares, Common Shares, and Debt to finance its projects. Use the following information to calculate its WACC. It plans to issue perpetual preferred stock with an dollar 11.00 dividend. The preferred stock is currently selling for dollar 97.00; but flotation costs will be 5 percentage of the market price. Its Capital Structure consists of 13.62 percentage of preferred shares. The total value of preferred shares is dollar 92,150. 4 years ago, Trivoli sold an issue of bonds with 10-year maturity, dollar 1000 par value, 10 percentage coupon rate, and semiannual interest payments. Currently, interest rates are 6.00143745 percentage. It has 300 Bonds outstanding. Trivoli has 10,000 commons shares outstanding, with each worth dollar 22.50 and the return on equity is16 percentage. Trivoli's tax rate is 40 percentage. Assume Trivoli Company has the following cash flows from 2 projects it is currently evaluating. Use the Trivoli WACC (rounded to 2 decimal places) you calculated above to evaluate these independent projects. Which projects would you pick under NPV, IRR, MIRR, Payback, and Discounted Payback if we assume Trivoli managers want to recoup their investment in 3 years? For every project accepted or rejected under each method, give a reason. Calculate the cross over rate.

Explanation / Answer

Cost of Preferred Stock Dividend/(Price -Flotation Costs) 11/(97-(5%*97)) 0.1194 11.94% Semi-annual i= 0.0600143745/2 = 0.030007187 After-tax cost of Debt=0.0600143745(1-0.4)= 0.036008625 p.a. Price of the bond=((5%*1000)*((1-(1+0.030007187)^-12)/0.030007187))*(1000/1.030007187^12) 349033 Type of capital Market Value Proportion Cost Prop.*Cost Pref.Sh. 92150 0.1383 0.1194 0.016516047 Debt 349033 0.5239 0.036 0.018861466 Equity 225000 0.3377 0.16 0.054039205 Total 666183 1 0.089416719 WACC= 8.94% Project A Project B Year C/Flows PV F @ 8.94% PV @ 8.94% Year C/Flows PV F @ 8.94% PV @ 8.94% 0 -1250 1 -1250 0 -1550 1 -1550 1 100 0.91794 91.79 1 800 0.91794 734.35 2 300 0.84261 252.78 2 725 0.84261 610.89 3 400 0.77346 309.38 3 325 0.77346 251.37 4 700 0.70999 496.99 4 325 0.70999 230.75 5 325 0.65172 211.81 5 325 0.65172 211.81 NPV = 112.76 NPV = 489.17 IRR = 12% 23% Payback Project A Project B Year C/Flows Cum. C/F Dis. C/F Cum. Dis. C/F Year C/Flows Cum. C/F Dis. C/F Cum. Dis. C/F 0 -1250 -1250 -1250 -1250 0 -1550 -1550 -1550 -1550 1 100 -1150 91.79 -1158.21 1 800 -750 734.35 -815.65 2 300 -850 252.78 -905.42 2 725 -25 610.89 -204.76 3 400 -450 309.38 -596.04 3 325 300 251.37 46.62 4 700 250 496.99 -99.05 4 325 625 230.75 277.37 5 325 575 211.81 112.76 5 325 950 211.81 489.17 PayBack 3+(450/700) PayBack 2+(25/325) 3.64 Yrs. 2.08 Yrs. Discounted Payback 4+(99.05/211.81) Discounted Payback 2+(204.76/251.37) 4.47 Yrs. 2.81 Yrs.

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