Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Paragon Bhd., a manufacturer of electronic equipment, plans to invest RM1 million in a new product range and has forecast the following financial information: Paragon

Paragon Bhd., a manufacturer of electronic equipment, plans to invest RM1 million in a new product range and has forecast the following financial information:

image text in transcribed

Paragon Bhd., a manufacturer of electronic equipment, plans to invest RM1 million in a new product range and has forecast the following financial information: The above cost forecasts have been prepared based on current prices and no account has been taken of depreciation and inflation of 4% per year on variable costs and 3% per year on fixed costs. Working capital investment accounts for RM200,000 of the proposed RM1 million investment and machinery for RM800,000. Paragon Bhd. uses a four-year evaluation period for capital investment purposes but expects the new product range to continue to sell for several years after the end of this period. The company pays tax on profits in the year in which liabilities arise at an annual rate of 26% and depreciation on machinery on a 25% per year basis. The company's target capital structure is 40% debt and 60% common stock. The after-tax yield to maturity on its bond is 7.8%. The risk-free rate (kr) is 5 percent, and the market risk premium (kmkr) is 7 percent. The company's current beta is 1.4. Required: a) Calculate the company's weighted average cost of capital. (4 Marks) b) Calculate the net present value (NPV) of the proposed investment and comment on your findings. (21 Marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Industrializing Financial Services With DevOps

Authors: Spyridon Maniotis

1st Edition

1804614343, 978-1804614341

More Books

Students also viewed these Finance questions

Question

Why are managers often unaware of the magnitude of quality costs?

Answered: 1 week ago

Question

What is the specific purpose of an acceptable use policy?

Answered: 1 week ago