4. [16 points] Burton currently has $850,000 of long-term debt outstanding, 5,000 shares of preferred stock ($10 par) with a market price of $12, and 20,000 shares of common stock ($20 par) with a market price of $53 per share. They have used a WACC of 14% in the past to evaluate projects but want to determine their current required return for new investments.

Debt: Burton can sell a 10-year, $1,000 par value, 7 percent annual coupon bond for $975. A flotation cost of 2 percent of the face (par) value would be required. Additionally, the firm has a marginal tax rate of 34 percent.

Preferred Stock: Burton pays $1 dividends annually on their preferred shares. The shares are currently selling for $12 in the secondary market. They do not have plans to issue any additional preferred stock.

Common Stock: Burton's common stock is currently selling for $53 per share. The dividend expected to be paid at the end of the coming year is $4. Its dividend payments have been growing at a constant 3% rate. It is expected that to sell all the shares, a new common stock issue must be underpriced $1 per share and the firm must pay 1% of market value per share in flotation costs.

a. Calculate the after-tax cost of debt 5.05%

b. Calculate the cost of preferred equity 8.33%

c. Calculate the cost of common equity 10.77%

d. Calculate the WACC 8.26%

e. Re-calculate the NPV for the project in #1 above using this new WACC.

f. Should Burton accept the project when considering this revised cost of capital?

JUST LOOKING FOR E AND F.

THIS IS FOR THE CASH FLOWS

Burton, a manufacturer of snowboards, is considering adding a more sophisticated machine. The following information is given.

The proposed machine will cost $120,000 and have installation costs of $15,000. It will be depreciated using a 5 year MACRS recovery schedule. It can be sold for $10,000 after five years of use (at the end of year 5).

The incremental earnings before taxes and depreciation (EBITDA) are projected to be:

Year 1: 43,000, Year 2: 45,000, Year 3: 46,000, Year 4: 49,000, Year 5: 53,000

Burton pays 34 percent taxes on ordinary income and capital gains.

They expect a large increase in sales so their Net Working Capital will increase by $20,000.

The maximum payback period allowed is 4 years.

They are currently using a WACC of 14% to evaluate investment projects.

Calculate the initial investment required for this project

$155,000

Determine the incremental after-tax operating cash flows

-155,000, 36540, 42756, 38193.6, 37040.16, 417178.24

Find the terminal cash flow for the project

$41,718

Find the Payback period, NPV, IRR, and MIRR.

Payback 4.011 years, NPV -18132.04 IRR 8%

Should the new machine be purchased? Why or why not?

NO, NPV is Negative, MIRR is lower than hurdle