A mining company has discovered a small silver deposit neighbouring its existing mine site. It has been

Question:

A mining company has discovered a small silver deposit neighbouring its existing mine site. It has been estimated that there is a 10-year supply of silver in the deposit that would return $13.5 million annually to the firm. Th e estimated cost of developing the site is $63.6 million and could be financed by the issuance of shares. Th e firm has experienced significant growth, and this is reflected in a cost of equity of 21.6 percent. Aft er analyzing the returns to the project, the firm’s chief financial officer (CFO) recommends to the board not to continue with it as it is not profitable to the firm. However, in speaking with an investment dealer the following week, the CFO is told that it would be possible to float bonds for up to $42 million carrying a coupon of 12 percent. The flotation costs for debt and equity are both 1.2 percent and the marginal tax rate for the firm is 40 percent. Is it profitable for the firm to continue with the project now?

Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Dealer
A dealer in the securities market is an individual or firm who stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). A dealer seeks to profit from the spread between the...

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