Question
Apel Investment Company has GH 1,800,000 of interest-bearing bond outstanding. The outstanding bonds have a 11% coupon and a 14% yield to maturity. Management believes
Apel Investment Company has GH1,800,000 of interest-bearing bond outstanding. The outstanding bonds have a 11% coupon and a 14% yield to maturity. Management believes they could issue new bonds at a premium of 105% that would provide a similar yield to maturity. Also, the companys prepared stock currently stands at GH1,200,000 and trades at GH60.00 per share. The company pays a dividend of GH3.00 per share. Furthermore, the companys common stock sells for GH15.00 per share with 200,000 shares in issue. The company has a beta of 1.2, whiles the governments T-Bill has an interest rate of 12%, with a 18% average return on the market. The companys marginal tax rate is 40%.
Management is considering investing in a new project, the details of which are as follows:
GH
Project cost 2,000,000.00 Estimated net profit:
Year 1 (22,000.00)
Year 2 192,000.00
Year 3 300,000.00
Year 4 270,000.00
Year 5 180,000.00
Additional information;
- Depreciation is based on the straight line method.
- The estimated residual value of the project at the end of its useful life is GH400,000.
From the above information, you are required to calculate, |
|
|
a. after tax cost of debt |
| (4 marks) |
b. cost of preferred stock |
| (4 marks) |
c. cost of equity using the capital asset pricing model |
| (4 marks) |
- weight average cost of capital (4 marks)
- Using the net present value method, assess the viability of the proposed project (10 marks)
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