Question
A firm has the opportunity to invest in a project that costs $4 million and is expected to generate total cash flows of $350,000 next
A firm has the opportunity to invest in a project that costs $4 million and is expected to generate total cash flows of $350,000 next year that will grow at 2% per year indefinitely. The firm faces a 21% tax rate and has the following financing outstanding:
Debt:8,500 bonds with an annual coupon rate of 5% with a current price quote of 113.65 and 20 years to maturity.
Preferred stock: 150,000 shares of 6 percent preferred stock with a current price of $50 and a par value of $100.
Common stock:500,000 shares outstanding, selling for $40 per share. The company will pay a dividend of $2 per share and expects it to grow at 9 percent annually.
The firm will have to issue new securities to finance the project. Flotation costs for new common stock are 7 percent, for new preferred stock, 4 percent, and for new debt, 3 percent.
Compute the NPV and indicate whether the project should be accepted.
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