Question
CASE STUDY-UNIT 5 - Cash Flows (dollars in millions) There are no terminal values for the projects Current debt is $100 million (at 7%) and
CASE STUDY-UNIT 5
-
Cash Flows
(dollars in millions)
There are no terminal values for the projects
Current debt is $100 million (at 7%) and current equity is $300 million.
The treasury rate is 4%, AAA rated bonds are trading at 7%, the company tax rate is 35%, and current levered beta is 1.40.
The company will either fund the projects completely through debt (new bonds at 10% interest), completely through equity (new stock issuance), or will fund half through debt (new bonds at 10% interest) and half through new stock issuance.
If the company funds 100% through debt, the new levered beta will be 1.35. If it chooses to fund 100% through equity, the new levered beta will be 1.15, and if it funds 50% through debt and 50% through equity, the new levered beta will be 1.25.
Required:
Please submit a spreadsheet with the following items:
- Determine Ingenuity's current WACC andits potential WACC under each the three funding scenarios.
- Calculate and prepare table showing the NPV, IRR, and Payback metrics for each of the projects utilizing the company WACC for funding scenario.
- Which funding option should the corporate finance department recommend? Why?
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