Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

FINA Company's assets are $750 million, financed through bank loans, bonds, preferred stocks, and common stocks. Tax rate is 15 percent. The amounts are as

image text in transcribed
FINA Company's assets are $750 million, financed through bank loans, bonds, preferred stocks, and common stocks. Tax rate is 15 percent. The amounts are as follows: Bank loans: $ 100 million borrowed at 3% Bonds: $280 million, paying 5% coupon with semi-annual payments, and maturity of 10 years. FINA sold its $1,000 par-value bonds for $1020 and had to incur $20 flotation cost per bond. Preferred Stocks: $120 million, paying $15 dividends per share. FINA sold its preferred shares for $220 and had to incur $20/share flotation cost. Common Stocks: $250 million, beta is 2, the risk-free rate is 6 percent, and the market rate is 10%. a) What is the after-tax cost of the loans? b) What is the after-tax cost of the bonds? c) What is the after-tax cost of the preferred stocks? d) What is the after-tax cost of the common stocks? e) Calculate the cost of capital. Please show your work precisely by indicating each component and weight. f) Calculate the NPV, IRR, and payback period of a project with the cashflows below. Use the cost of capital you found in "e" when calculating the NPV and IRR. Should you accept or reject the project? Why? Cost of the project: S14,000 Year After tax Cash flow 1 $4,000 2 $4,000 3 $4,000 4 $4,000 $4,000

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

Students also viewed these Finance questions

Question

4. What are heuristics? Give an example.

Answered: 1 week ago