Question
Firm B, a bike manufacturer, has 20 million shares trading at $40.0. The book value of its interestbearing debt is $390m, $100m in cash, and
Firm B, a bike manufacturer, has 20 million shares trading at $40.0. The book value of its
interestbearing debt is $390m, $100m in cash, and its equitys book value is $500m. Its debts
rating is AA, its interest rate is 4.8% and the yieldtomaturity (YTM) of AArated bonds is
about 7.5%. Its equity beta is 1.5 and the corporate tax rate is 35%. The YTM of longterm
government bonds is 2% and the market risk premium currently used is 6%. Firm B has a
bike project costing $50m and yielding a free cash flow of $3.5m per year forever. The
project would be financed with a new 15year $40m senior loan with a 5% interest rate.
a. What is Burgundy's weightedaverage cost of capital?
b. What is the projects opportunity cost of capital?
c. What is the projects NPV?
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