Question
A project has the following incremental cash flows for years zero, through year 4, respectively:-$1,500, $600, $400, $500, and $300. Also assume the following:The risk-free
A project has the following incremental cash flows for years zero, through year 4, respectively:-$1,500, $600, $400, $500, and $300. Also assume the following:The risk-free rate is 2%; the MRP is 7% and this firm's stock is only four-fifths as risky as the market on average.The current stock price is $10 per share; the most recent dividend was $0.50 per share and dividends are expected to grow at 4% per year for the foreseeable future.The firm has 20,000 bonds outstanding with a par value of $1,000, annual coupon rates of 6%, 15 years to maturity and a current price of $900.The firm has 8,000,000 shares of stock outstanding with a market price per share of $10 and a corporate tax rate of 40 percent.What is the NPV of this project?Should it be accepted according to the NPV rule?What can you say about the IRR of this project?Should it be accepted according to the IRR rule? (Use the average of the two approaches for estimating the before-tax cost of equity and the approximate YTM formula for estimating the before-tax cost of debt).
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