Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Can you solve this question in 24 hours? Question A firm is evaluating the possible purchase of a new machine that costs $400,000. An additional

image text in transcribed

Can you solve this question in 24 hours?

Question A firm is evaluating the possible purchase of a new machine that costs $400,000. An additional $20,000 will be incurred for shipping and installation. The machine will require an initial increase in net working capital of $75,000. The machine will be fully depreciated on a straight-line basis over 5 years, though the firm expects to keep and use the machine for 7 years. At the end of the 7 years, it is expected that the machine will have a market value of $45,000 If the machine is purchased, the firm expects that its annual revenue will be $178,000 higher than without the machine. However, annual operating expenses (exclusive of depreciation) will be higher as well, to the extent of $24,000 The firm's marginal tax rate is estimated to be 25%. The firm has 125,000 bonds outstanding, each with a face value of $1000. These bonds have a coupon of 7.5%, pay interest semiannually. They were issued eight years ago with an original maturity of 20 years. They are currently trading at a quoted price of 117.61 Preferred shares for this firm are currently trading at $86.75. These have a face or par value of $100, and pay a fixed quarterly dividend of $1.50 per share in perpetuity. The firm has 325,000 of these shares outstanding. The firm has 4 million shares of common stock outstanding. These have just paida dividend of $3.15 (this is Do). Analysts expect that the firm's earnings and dividends will grow at a constant rate of 4.25% for the foreseeable future. Shares are currently trading at $41.24. (NOTE: Use just one model/method to figure the cost of common equity) What is the firm's estimated after-tax cost of debt? What is the firm's estimated cost of preferred equity? What is the firm's estimated cost of common equity What is the firm's estimated weighted average cost of capital (WACC)? What is the proposed project's IRR? Based solely on the IRR, should the project be taken? Why/why not? What is the proposed project's NPV? Based solely on the NPV, should the project be taken? Why/why not

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Personal Finance

Authors: Jeff Madura

4th Edition

0136117007, 9780136117001

More Books

Students also viewed these Finance questions