Question
Caspers is analyzing a proposed expansion project that is much riskier than the firms current projects. Thus, the project will be assigned a discount rate
Caspers is analyzing a proposed expansion project that is much riskier than the firms current projects. Thus, the project will be assigned a discount rate equal to the firms cost of capital minus 2 percent. The proposed project has an initial cost of $80 million dollars that will depreciate on a straight-line basis over 10 years. The project also requires additional inventory of $500,000 over the projects life. Management estimates the facility will generate an operating cash flow (OCF) of $12 million a year over its 10-year life. After 10 years, the company plans to sell the facility for an estimated $8 million. The company has 100,000 shares of common stock outstanding at a market price of $100 a share. Next year, this stock will pay an annual dividend of $1.50 a share. The dividend is expected to increase by 3.5 percent annually. The firm also has 10,000 shares of 10 percent preferred stock with a market value of $90 a share. The preferred stock has a par value of $100. The company has a 7 percent, semiannual coupon bond issue outstanding with a total face value of $1.2 million. The bonds are currently priced at 95 percent of face value and mature in 8 years. The tax rate is 34 percent. What is the total value of Casper?
$12,040,000 | |||||||||||||||||||||||||||||||||||||||||||||||
$10,030,000 | |||||||||||||||||||||||||||||||||||||||||||||||
$8,020,000 | |||||||||||||||||||||||||||||||||||||||||||||||
$6,010,000 $4,000,000 | |||||||||||||||||||||||||||||||||||||||||||||||
calculate the appropriate cost of debt (rounded to the nearest tenth percent).
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