Question
National Electric Company (NEC) is considering a $41 million project in its power systems division. Tom Edison, the companys chief financial officer, has evaluated the
National Electric Company (NEC) is considering a $41 million project in its power systems division. Tom Edison, the companys chief financial officer, has evaluated the project and determined that the projects unlevered cash flows will be $3.1 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 companys pretax cost of debt is 5.1 percent and its cost of equity is 10.3 percent. The companys target debt-to-value ratio is 60 percent. The project has the same risk as the companys existing businesses and will support the same amount of debt. The tax rate is 21 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) |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started