It is publically traded. The current stock price is 3 dollars per share and ther

Question

It is publically traded. The current stock price is 3 dollars per share and there are 20 million shares outstanding. the present value of the company's debt is 40 million. the company has a bond issue outstanding will 6 years to maturity. the face balue is $1,000 the coupon rate is 8% paid annual and the bond is currently selling for $1,020. the company's corporate tax rate is 35 % and their beta is 1.41. The current risk free rate is 5% and the historic market return is 12%.

1. What is the WACC?

2. What is the project NPV?

3. What is the project IRR?

Quiz Ray's Racks, a company that develops and manufactures bike racks and locks, has developed a new, highly simplified bike lock. It can go into production for an initial investment in equipment of $5.7 million. The equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for $671,000. The firm estimates production costs of $1.80 per lock and believes that the locks can be sold for $8 each. The firm believes that working capital (primarily for spare parts) must be maintained at a level of 10% of next year's forecast sales. The project will come to an end in 6 years, when the lock becomes technologically obsolete. The firm's tax bracket is 35%. This project is considered to be an average risk project for Ray's Racks. Sales forecasts (number of locks sold) are given in the following table. 6 Thereafter 0 Year 0 2 4 Sales (locks) 0 400,000 500,000 700,000 700,000 500,000 300,000

Explanation / Answer

P0 3 Shares         2,00,00,000 Mkt Value         6,00,00,000 We=.6 debt         4,00,00,000 Wd=.4 Kd=8%(1-.35) 5.20% Ke=5%+1.41*(12%-5%) 14.87% WACC=.6*14.87%+.4*5.2% 11.00% 1/(1+.11)^n Year Capital flow Working Capital OCF FCF Disc rate PV 0         -57,00,000          -3,20,000 -60,20,000 -60,20,000 1             -80,000    19,44,500    18,64,500      0.90090    16,79,730 2          -1,60,000    23,47,500    21,87,500      0.81162    17,75,424 3                        -      31,53,500    31,53,500      0.73119    23,05,812 4           1,60,000    31,53,500    33,13,500      0.65873    21,82,705 5           1,60,000    23,47,500    25,07,500      0.59345    14,88,079 6             4,36,150           2,40,000    15,41,500    22,17,650      0.53464    11,85,646 NPV    45,97,396 Calculation Residual value after tax Sales Value             6,71,000 Tax at 35%             2,34,850 Residual value net of taxes             4,36,150 Calulcation of working Capital                          -                            1                    2                     3                   4                     5                     6 Sales units           4,00,000      5,00,000      7,00,000     7,00,000      5,00,000      3,00,000 Rate                          8                    8                     8                   8                     8                     8 Sales value         32,00,000    40,00,000    56,00,000 56,00,000    40,00,000    24,00,000 Working capital             3,20,000           4,00,000      5,60,000      5,60,000     4,00,000      2,40,000 (Inc)/Dec in wc           -3,20,000             -80,000    -1,60,000                   -       1,60,000      1,60,000      2,40,000 Calculation of Income                          -                            1                    2                     3                   4                     5                     6 Sales units           4,00,000      5,00,000      7,00,000     7,00,000      5,00,000      3,00,000 Rate                          8                    8                     8                   8                     8                     8 Sales value         32,00,000    40,00,000    56,00,000 56,00,000    40,00,000    24,00,000 Cost                    1.80              1.80               1.80             1.80               1.80               1.80 Outflow           7,20,000      9,00,000    12,60,000 12,60,000      9,00,000      5,40,000 Depreciation           9,50,000      9,50,000      9,50,000     9,50,000      9,50,000      9,50,000 Total Cost         16,70,000    18,50,000    22,10,000 22,10,000    18,50,000    14,90,000 PBT         15,30,000    21,50,000    33,90,000 33,90,000    21,50,000      9,10,000 Tax at 35%           5,35,500      7,52,500    11,86,500 11,86,500      7,52,500      3,18,500 PAT           9,94,500    13,97,500    22,03,500 22,03,500    13,97,500      5,91,500 Inflow(PAT+Depn)         19,44,500    23,47,500    31,53,500 31,53,500    23,47,500    15,41,500 1/(1+.33)^n 1/(1+.34)^n Year Capital flow Working Capital OCF FCF Disc rate Disc rate PV-33% PV-34% 0         -57,00,000          -3,20,000 -60,20,000 -60,20,000 -60,20,000 1             -80,000    19,44,500    18,64,500      0.75188        0.74627    14,01,880    13,91,418 2          -1,60,000    23,47,500    21,87,500      0.56532        0.56110    12,36,644    12,27,416 3                        -      31,53,500    31,53,500      0.42505        0.42188    13,40,411    13,30,408 4           1,60,000    31,53,500    33,13,500      0.31959        0.31721    10,58,962    10,51,059 5           1,60,000    23,47,500    25,07,500      0.24029        0.23850      6,02,536      5,98,039 6             4,36,150           2,40,000    15,41,500    22,17,650      0.18067        0.17932      4,00,667      3,97,677 NPV          21,099        -23,984 irr=33+21099/(21099+23984)*(34-33) 33.47%

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.