Question
Acme Corp has a target debt/equity ratio of 0.30. It was $300 million in bonds outstanding with a yield of 6% and 50 million shares
Acme Corp has a target debt/equity ratio of 0.30. It was $300 million in bonds outstanding with a yield of 6% and 50 million shares of stock outstanding with a current market price of $20 per share. The companys beta is 1.18 and the risk-free rate of interest is 4% with a market risk premium of 6%. The firm has a tax rate of 25%. The company is looking to raise $200 million to build a second factory. The new factory will increase output substantially. The table below shows the anticipated cash flows generated from the new factory including a salvage value in year 5. What is the NPV of this project?
Year | Cash Flow ($mill) |
0 | -200 |
1 | 35 |
2 | 45 |
3 | 55 |
4 | 65 |
5 | 95 |
$40.68 million |
$19.54 million |
$16.54 million |
$45.87 million |
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