Question
FINA Companys assets are $750 million, financed through bank loans, bonds, preferred stocks, and common stocks. The amounts are as follows: Bank loans: $ 100
FINA Companys assets are $750 million, financed through bank loans, bonds, preferred stocks, and common stocks. The amounts are as follows:
Bank loans: $ 100 million borrowed at 3%
Bonds: $280 million, paying 8% coupon with semi-annual payments, and maturity of 10 years. FINA sold its $1,000 par-value bonds for $970 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 per share flotation cost.
Common Stocks: $250 million, beta is 3.20, the risk-free rate is 5 percent, and the market rate is 10%.
FINA is considering a new project that will last for five years with the following after-tax cash flows:
Cost of the project: $700,000
Year | Cash flow |
1 | 148,000 |
2 | 148,000 |
3 | 148,000 |
4 | 148,000 |
5 | 253,000 |
- If FINA is subject to a 20% tax rate, what is the WACC for FINA?
- The company uses WACC to compute the NPV. What is the NPV and IRR of the project? Should FINA accept the project according to IRR and NPV?
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