Handy Tools Limited is considering a project for producing a piece of new gardening equipment. The project will require an investment of Taka (40+51) lakh for machines, Taka 34 lakh for building, land of Taka 8 lakh, and Taka 12 lakh for furniture. In addition, the project will use a warehouse owned by the firm and rented out to others at Taka 6 lakh annually. Working capital requirement is about Taka 10 lakh.

The project has an estimated life of 5 years. The firm expects to sell Taka (60 + 51) Lakh in the first year and Taka (70+51) Lakh each year from year 2 to year 5. Variable cash operating costs, excluding depreciation, will be approximately 40 percent of the sales value. Fixed Costs will be approximately Taka 5 lakh annually. In addition, the firm will have to pay a royalty of Taka 2 lakh annually.

Machines and furniture have a useful life of five years. The tax authority will allow accelerated depreciation on the machine at 30%, 25%, 20%, 15%, and 10% on cost respectively in year one through year five. The machine will have a salvage value of Taka 10 lakh at the end of the project. Furniture will be depreciated on a straight-line basis towards salvage values Taka 2 lakh. The building will be depreciated at 8 percent of cost each year, and the market value of the land and building at the end of the fifth year is expected to be Taka 85 lakh.

The corporate tax rate is 25 percent. The discount rate (cost of capital) is 12 percent. Should the firm take up the project? Estimate NPV and MIRR.

1. What features make a corporate bond risky to investors? Explain.

2. Consider the following data to estimate the cost of debt, the cost of preferred stock, the cost of retained earnings, and the WACC.

Components		Amount (Taka)
Debt	9% annual interest rate compounded semiannually, compensating balance requirement 5%, Tax rate 25%	800 million
Preferred Stock	16% Taka 100 Preferred stocks sold at Taka (100 + last 2 digits of your ID number); Floatation cost 8%	400 million
Common Stock	Current stock price Taka (520 + last 2 digits of your ID Number); Last dividend Taka 60; constant growth rate of dividend 4%.	800 million