JW Technologies, Inc. (JWT) is a 5-year-old public company founded to develop new battery technology for various electronic devices. The company plans to license the technology and does not plan to invest in manufacturing facilities. The company has previously issued common shares and one bond issue to fund its activities.

The bonds have a remaining term of 20-years, a 10% semiannual coupon with a face (par) value of $1,000. The bond may be called in 5 years at a call price of $1,050 and currently sells for $1,100.

The stock currently sells for $50/share. The expected market return is 15% and the risk-free rate is 3%. The JWT stocks beta is 1.2.

The company is considering a project to build a prototype machine using existing funds. The machine costs $90,000 and has delivery and installation costs of $10,000. The company will fully use a building which it currently subleases for $20,000. The companys lease obligation ends at the end of the project period.

Having the machine will increase royalties received by $120,000 per year for five years. Incremental expenses for the sales are $25,000 plus depreciation. The machine will be depreciated over five years and has a useful life of five years. The tax rate for JWT is 34%.

The current market value of debt is $1,000,000 and the current market value of equity is $1,400,000. The ratio is similar to the long-term targeted mix of capital.

• What are the key features of a bond? What are call provisions?
• What is the JWT bonds yield to maturity?
• What is the JWT bonds current yield?
• What is the JWT bonds yield to call?
• How do interest rates impact bonds?
• If interest rates go up due to inflation, what will happen to the price of the bond?
• What is the Net Present Value (NPV) and Internal Rate of Return (IRR) for the project?
• Should the project be approved? Why?