Dyrdek Enterprises has equity with a market value of $11.8 million and the marke
ID: 2810715 • Letter: D
Question
Dyrdek Enterprises has equity with a market value of $11.8 million and the market value of debt is $4.05 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 2.1 percent. The new project will cost $2.40 million today and provide annual cash flows of $626,000 for the next 6 years. The company's cost of equity is 11.47 percent and the pretax cost of debt is 4.98 percent. The tax rate is 35 percent. What is the project's NPV? $377,779 $213,119 $180,192 $212,843 $559,481
Explanation / Answer
Cost of equity = 11.47%
After cost of debt = 4.98%(1-0.35)
=4.98%(0.65)
=3.237%
Statement showing WACC
Discount rate to be used = 9.37%+2.1% =11.47%
Statement Shaowing NPV
Source of capital Market Value Weight K WACC = Weight*K Equity 11.8 74% 11.47% 8.54% Debt 4.05 26% 3.24% 0.83% Total 15.85 9.37%Related Questions
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