Blake Media is considering expanding into a new market. The upfront cost will be $10,000,000. It is expected that the new market will have revenue of $1,500,000 in year 1; $2,500,000 in years 2 and 3; $3,000,000 in years 4 and 5; and $2,000,000 in year 6. They have asked you to calculate their WACC for evaluating this project and then providing them with some professional advice on whether or not they should undertake this expansion.

Blake Media currently has the following Capital Information:

Blake Media has 150,000 outstanding shares of common stock at a market price of $110 per share. The firms 10,000 shares of $100 par value 7% preferred stock are currently priced at $105 per share. Blake also has 10,000 outstanding 10-year semi-annual bonds currently priced at 95 with a coupon rate on those bonds of 6%. Blake recently paid a dividend on its common stock of $8,00/share which is expected to grow at a constant rate of 6%. Blake Media stock has a Beta of 1.2. The risk-free rate is 5% and the market risk premium is 8.4%. If Blake were to issue new shares of common or preferred stock, they would have flotation costs of 6%. Blake Media is located in the United States and pays the current corporate tax rate of 21%.

What is the total current value of the debt?

What is the total current value of the preferred Stock?

What is the total current value of the Common Stock?

What is the current cumulative value of the Debt and Equity?

What is the proportion (weight) of the Debt as a percentage of total capital? (2 decimal places, i.e. 10.25%)

What is the proportion (weight) of the Preferred Stock as a percentage of total capital? (2 decimal places, i.e. 10.25%)

What is the proportion (weight) of the Common Stock as a percentage of total capital? (2 decimal places, i.e. 10.25%)

What is the current after-tax cost of the Debt? (2 decimal places, i.e. 10.25%) (Remember that you must calculate the current Yield to Maturity)

What is the current cost of issuing new Preferred Stock? (2 decimal places, i.e. 10.25%) (Remember Net Price)

What is the cost of the Common Equity if internally generated? (Use CAPM) (2 decimal places)

What is the cost of the Common Equity if internally generated? (Use DCF) (2 decimal places)

What is the average cost of internally generated Common Equity? (Average of CAPM and DCF) (2 decimal places)

What is the cost of Common Stock if externally generated? (2 decimal places) (Remember Net Price)

Calculate the WACC (use the externally generated cost of Common Stock) (2 decimal places)

Now use the WACC to evaluate this project.

What is the NPV of this proposed expansion?

Given the NPV decision criteria would the company accept this project? Why or Why Not?

What is the IRR of this proposed project?

Given the IRR decision criteria would the company accept this project? Why or Why Not?

What is the Regular (non-discounted) Payback Period?

Given all of the information, would you recommend that Blake Media take on this expansion project? Why or Why Not?

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