Question
ABC Company has a target Debt Ratio of 60%. ABC has a debt issue outstanding that is currently trading at 105% of its par value
ABC Company has a target Debt Ratio of 60%. ABC has a debt issue outstanding that is currently trading at 105% of its par value of $1,000. The outstanding issue pays annual interest payments, has a coupon rate of 8.2%, and 7 years remaining until maturity; new debt with a 30-year original maturity will incur an 5% flotation cost. Further, ABC's common stock trades currently at a price of $36.45 and the market expects ABC to pay a dividend in one year of $3.80 (ABC just paid a dividend of $3.42, and this growth rate is expected to continue); ABC pays out all net income as dividends; and new equity will incur a 12% flotation cost. ABCs tax rate is 32%.
- What is the YTM on ABCs existing debt?
- What is ABC's before tax cost of debt?
- What is ABC's after-tax cost of debt?
- What is ABCs expected future growth rate?
- What is ABC's cost of internal equity?
- What is ABCs cost of external equity?
- What is ABC's WACC with internal equity?
h. What is ABCs WACC with external equity?
ABC (from above) is currently evaluating two mutually exclusive projects. Project A has a time 0 equipment cost of $280,000 and is expected to return cash flows of $75,000 per year for the next 14 years. Project B has a time 0 equipment cost of $1,056,000 and is expected to return cash flows of $245,000 per year for the next 14 years.
- What is the IRR for project A?
- What is the IRR for project B?
- What is the NPV for project A?
- What is the NPV for project B?
- Which project should ABC adopt?
- Why?
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