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If Wild Widgets, Inc., were an all-equity company, it would have a beta of .85. The company has a target debt-equity ratio of .40. The
If Wild Widgets, Inc., were an all-equity company, it would have a beta of .85. The company has a target debt-equity ratio of .40. The expected return on the market portfolio is 10 percent and Treasury bills currently yield 2.8 percent. The company has one bond issue outstanding that matures in 15 years, a par value of $1,000, and a coupon rate of 5.8 percent. The bond currently sells for $1,040. The corporate tax rate is 21 percent. a. What is the company's cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the company's weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) 401% Cost of debt b. Cost of equity c. WACC National Electric Company (NEC) is considering a $45.02 million project in its power systems division. Tom Edison, the company's chief financial officer, has evaluated the project and determined that the project's unlevered cash flows will be $3.13 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: Issuing 10-year bonds or issuing common stock. The company's pretax cost of debt is 6.2 percent and its cost of equity is 11 percent. The company's target debt-to- value ratio is 80 percent. The project has the same risk as the company's existing businesses and it will support the same amount of debt. The tax rate is 22 percent. Calculate the weighted average cost of capital. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Calculate the net present value of the project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) NIIIIIIIIIIIIIIIIIIIIII Weighted average cost of capital Net present value
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