Assume the firm\'s target capital structure is 60 percent equity and 40 percent
ID: 2752639 • Letter: A
Question
Assume the firm's target capital structure is 60 percent equity and 40 percent debt with after tax costs of 18% and 10.5% respectively. Assume the following cash follows: CF0 = -$1,000, CF1 = $700, CF2 = $700. What is the NPV? Assume the firm's target capital structure is 60 percent equity and 40 percent debt with after tax costs of 18% and 10.5% respectively. Assume the following cash follows: CF0 = -$1,000, CF1 = $700, CF2 = $700. What is the NPV? Assume the firm's target capital structure is 60 percent equity and 40 percent debt with after tax costs of 18% and 10.5% respectively. Assume the following cash follows: CF0 = -$1,000, CF1 = $700, CF2 = $700. What is the NPV? Assume the firm's target capital structure is 60 percent equity and 40 percent debt with after tax costs of 18% and 10.5% respectively. Assume the following cash follows: CF0 = -$1,000, CF1 = $700, CF2 = $700. What is the NPV?Explanation / Answer
Calculation of Discount rate (WACC):
WACC = (Cost of Debt * weight of Debt)+ (Cost of Equity * weight of Equity )
WACC = (18% * 40%)+ (10.5% *60% ) =
13.50%
Calculation of NPV:
Year
Cash Flow (CF)
PVF (13.50%)
PV
CF
Calculation
PVF
CF*PVF
0
$ (1,000.00)
1
1.00000
$ (1,000.00)
1
$ 700.00
1/ (1+13.5%)^1
0.88106
$ 616.74
2
$ 700.00
1/ (1+13.5%)^2
0.77626
$ 543.38
Net Present value (NPV)
$ 160.12
Calculation of Discount rate (WACC):
WACC = (Cost of Debt * weight of Debt)+ (Cost of Equity * weight of Equity )
WACC = (18% * 40%)+ (10.5% *60% ) =
13.50%
Calculation of NPV:
Year
Cash Flow (CF)
PVF (13.50%)
PV
CF
Calculation
PVF
CF*PVF
0
$ (1,000.00)
1
1.00000
$ (1,000.00)
1
$ 700.00
1/ (1+13.5%)^1
0.88106
$ 616.74
2
$ 700.00
1/ (1+13.5%)^2
0.77626
$ 543.38
Net Present value (NPV)
$ 160.12
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.