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3 . a ) The capital structure of a company consists of debt and common equity. The firm has 3 , 0 0 0 ,
a The capital structure of a company consists of debt and common equity. The firm has bonds outstanding that are selling at par value. The par value of each bond is $ Bonds with similar characteristics are yielding a beforetax return of percent. The company also has shares of common stock outstanding. The stock has a beta of and sells for $ a share. The return on US Treasury bills is percent and the market rate of return is percent. The companys tax rate is percent. What is the firms weighted average cost of capital?
b The company is considering a fiveyear project that is expected to generate the following net or total aftertax cash flows.
Year Operating Cash flow OCF
$
The operating cash flow is defined as aftertax net income depreciation
The initial investment or initial cost of the project is $ The assets used in the project will have a beforetax market value salvage or resale value of $ at the end of project in year Assume that the assets are fully depreciated over the fiveyear life of the project and the book value at the end of year is zero. The project also requires an initial investment in net working capital of $ which is fully recoverable when the project ends in year The project has the same risk as the firm overall. Find the net present value NPV of the project.
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