part 2

Intro Bob's is a retail chain of specialty hardware stores. The firm has 21,000 shares of stock outstanding that are currently valued at $63 a share. Firm's Beta is 12 . The risk-free rate is 1% and the market risk premium is 6.7%. Firm expects to pay an annual dividend of $3 in one year: Dividend is expected to grow indefinitely at 5% annually. The firm also has 500 coupon bonds outstanding that have a face value of $1,000, a market price of $1.168, mature in 6 years and have a YTM of 5.648%. The tax rate is 35%. Part 1 [E E Attempt 1/10 for 10 pts. (Assuming CAPM computes the correct stock return, then is current stock price over or undervalued? - to be answered in final exam as a BONUS, no need to answer here) What is the company's weighted average cost of capital if CAPM is the night method for cost of equity? RB=rf+(E(rM)rf)=rf+E(MRP)=0.01+1.20.067=0.0904 Find the weights: we=D+EE=21,000863+500$1,16821,000$63=0.6938wd=1wd=0.3062WACC=weRE+wdRD(1t)0.69380.0004+0.30620.05648(10.35)0.07396 Part 2 - Altempt 1/10 for 10pts. The firm is considening expanding by builaing a new superstore. The risks associated with the superstore are comparable to the risks of the firms current operations The superstore wit require an intial investinent of 512.3 millon and is expected to produce casp infows of 51.3 milion annually over its 10 -year lite The initial. investitient will be depreciated on a straight une basis over the life of the project. Al the end of the 10 years, the fim expects to sell the superstore for 367 milion. What is the NifV of superstore profect? should the firm