Eastern Digital is planning on expanding its operations. Its initial outlay woul

Question

Eastern Digital is planning on expanding its operations.  Its initial outlay would be $12m.  The project would generate $2m per year over the next 10 years (starting at the beginning of next year).  Is this project worthwhile?

Eastern Digital has 300,000 shares outstanding which sell for $10 per share.  The extra risk associated with this stock suggests that the investor should get a return 5% greater than that being paid on its bonds.  The company has 10,000 10year bonds outstanding.  The bonds have a coupon rate of 8% (coupons paid semiannually), a face value of $1,000 and currently sell for $1,100.  The marginal tax rate for this company is 30%.  What is this company’s WACC? 4.

Explanation / Answer

particulars Capital Weight(A) Cost of capital (B) A*B Equity(300000*10) 3000000 0.230769231 0.106 0.024461538 Debt (1000*10000) 10000000 0.769230769 0.056 0.043076923 13000000 WACC 0.067538462 Year Cash Flows Discount @0.0675 Present value of cash flows 0 -12 1 -12 1 to 10 2 7.1042 14.2084 Net Present Value 2.2084 Conclusion: As the Net Present Value is positive the project should be accepted

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