Question
Montreal Manufacturing Company needs to purchase new machines to meet the demand for its product. The cost of the equipment is $100,000. It is estimated
Montreal Manufacturing Company needs to purchase new machines to meet the demand for its product. The cost of the equipment is $100,000. It is estimated that the firm will increase operating cash flow (OCF) by $22,000 annually for the next seven years. The firm is financed with 40% debt and 60% equity, both based on market values. The firm's cost of equity is 16% and its pre-tax cost of debt is 8%. The flotation costs of debt and equity are 2% and 8%, respectively. Assume the firm's tax rate is 34%.
| (A) | What is the firm's WACC? |
| (B) | Ignoring flotation costs, what is the NPV of the proposed project? |
| (C) | What is the weighted average flotation cost, fA, for the firm? |
| (D) | What is the dollar flotation cost of the proposed financing? |
| (E) | After considering flotation costs, what is the NPV of the proposed project? |
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Project Financing Analyzing And Structuring Projects
Authors: Frank J Fabozzi, Carmel De Nahlik
1st Edition
9811232393, 9789811232398
