Use the IRR decision rule to evaluate this project; should it be accepted or rej

Question

Use the IRR decision rule to evaluate this project; should it be accepted or rejected? -4 95%, reject 4.95%, accept -23. J8%, reject 23.18%, accept Oberon Inc. has a $20 million ($1000 face value) 10-year bond issue selling for 99% of par that pays an annual coupon of 7.25%. What would be Oberon's before-tax component cost of debt? 6.12% 7.02% 7.40% 8.15% Fern has preferred stock selling for 95 percent of par that pays an 8 percent annual coupon. What would be Fern's component cost of preferred stock? 7.60% 8.00% 8.42% 9.00% This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project. payback internal rate of return net present value profitability index

Explanation / Answer

Question 2 3) 7.40%   

   cost of debt = interest + 1/maturity(realisable value - net proceed) / 1/2(realisable value + net proceed)

=(7.25%*$1000) + 1/10 (1000 -990) / 1/2(1000+990)

=72.5 + [1/10* 10] / (1/2*1990)

= 72.5+ 1 / 995

= 73.5 / 995

= 7.39% (7.40% approx.)

Note:- net proceed = 99% of par

= 99% * $1000

=$990

Question 3 3) 8.42%

   cost of preferred stock = preferred stock dividend / net proceed

= (8% *$100) / $95

=8 / 95

=8.42%

Note:- Assume that the par value of preferred stock = $100

Net proceed = 95% *$100

= $95

Question 4 1) payback , the payback period is the lenght of time required to recover the initial cost of the project. When annual inflows are equal then the payback period will be calculated as;

   payback period = initial outflow / annual inflow

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