Question
An internet service provider (ISP) is about to purchase new equipment - recent loss of service issues have caused some key customers to switch to
An internet service provider (ISP) is about to purchase new equipment - recent loss of service issues have caused some key customers to switch to other providers. The cost of the equipment is $15,000,000. It is estimated that the firm will save $5,000,000 annually, pre-tax, for the next 6 years by installing the equipment. The firm is financed with 65% debt and 35% equity, based on market values. The firm's cost of equity is 11% and its pre-tax cost of debt is 4%. The flotation costs of debt and equity are 2% and 6%, respectively. Assume the firm's tax rate is 30%.
a. What is the firm's WACC?
b. Ignoring flotation costs and using your answer from part (a) as the discount rate, what is the NPV of the proposed project?
c. What is the weighted average flotation cost, fA, for the firm?
d. What is the dollar flotation cost of the proposed financing?
e. After considering flotation costs, what is the NPV of the proposed project?
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