Initial cash outlay is $50,000. The required rate of return is 9%. The length of time of the project is 6 years. Each year the project is expected to provide $12,500 of free cash flow.

1a. Calculate NPV

1b. Calculate the (estimated) IRR Hint: start with (I.C.O. / F.C.F)

The existing 10 year, 6% bonds are trading in the market at $900. The corporate tax rate is 32%

Estimated YTM formula: YTM=(Coupon+(par value-market value)/years)/((market value+par value)/2@)

After-tax interest rate = YTM (1-T)

2a. Calculate the interest rate for the new bonds.

2b.What is the after-tax interest rate for the new bonds?

OVER

Total assets of the firm is $5,000,000. Outstanding stock is 50,000 shares. EBIT is $500,000.

Corporate debt is 50% and the debt interest rate is 5%. The corporate tax rate is 40%.

EPS = NI / outstanding shares; ROE = NI / common equity

3. Calculate EPS

BONUS (10 extra points) calculate ROE