Answer this question

(a)Using the WACC, calculation of the NPV. Should RIC Inc. undertake the investment?

(b)When should a company undertake an investment using the NPV?

(c)Compare the IRR computed (2c) with the WACC. Should RIC Inc. go ahead with the project? ( A simple "Yes or No" will not do.)

(d)When should a company undertake an investment using the IRR?

information:

RIC Inc. has decided to finance this product line expansion by raising new capital. The company's optimal capital structure calls for 35% debt, 40% equity, and 25% preferred stock. RIC Inc. can issue a series of 8% coupon bonds with a $ 1000 par value. The bonds will mature in 10 years and will sell for $ 946 minus an issuance cost of $ 5. RIC Inc.'s marginal tax rate is 35 %.

Answer: Cost of Debt is 5.80%

RIC Inc's common stock is currently selling for $ 22 per share. Its present dividend is $ 1.96 a share and the expected long -term dividend growth rate is 8.5% . What is the cost of external equity for RIC Inc. assuming an issuance cost of $ 2.00 per share?

Answer: Cost of External Equity is 19.13%

RIC Inc. has just issued shares of preferred stock that pay an annual dividend of $ 2.15. The preferred stock was sold to the public at a price of$ 52.00 per share with issuance cost of $ 2.00 per share. What is the marginal cost of preferred stock for RIC Inc.?

Answer: Cost of Preferred Stock is 4.30 %

Net Cash Flow (26000) $ 6542 $ 7194 $ 6948 $ 23999

Therefore

(a)WACC is 10.76%

(b)Payback is 3.3 years

(c)NPV is 6866.48

(d)IRR is 20.12%

(e)Profitability Index is 1.26