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4. Neon Corporation has bonds outstanding with a total market value of $45 million and a yield to maturity of 6.5%. The company also has
4. Neon Corporation has bonds outstanding with a total market value of $45 million and a yield to maturity of 6.5%. The company also has 4.2 million shares of common stock outstanding, each selling for $30. The company's CEO considers the firm's current debt-equity ratio optimal. The corporate tax rate is 35%. The company's stock beta is 1.2. Treasury bills currently yield 3%, and the expected market risk premium is 7.5%. The company is considering the purchase of additional equipment that would cost $47 million. The expected unlevered cash flows from the equipment are $13.5 million per year for five years. Purchasing the equipment will not change the risk level of the firm. Use the weighted average cost of capital approach to determine whether Neon should purchase the equipment (30 marks)
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