Question 18

Question

Droz's Hiking Gear, Inc. has found that its common equity capital shares have a beta equal to 1.5 while the risk-free return is 8 percent and the expected return on the market is 14 percent. It has 7-year semiannual maturity bonds outstanding with a price of $767.03 that have a coupon rate of 7 percent. The firm is financed with $140,000,000 of common shares (market value) and $60,000,000 of debt. Droz's, is subject to a 35 percent marginal tax rate. The management of Drozs, is considering an expansion project that costs $1.2 million. The project will produce a cash inflow of $600,000 for 5 years.

What is the fraction of each securities? (Round to the two decimal places.)
A)	x d e b t = 0.3 , x c s = 0.7
B)	x d e b t = 0.7 , x c s = 0.3
C)	x d e b t = 0.4 , x c s = 0.6
D)

What is the pre-tax cost of debt? (Round to the nearest percent.)
A)	6%
B)	8%
C)	12%
D)	16%

What is the cost of common equity? (Round to the nearest percent.)
A)	13%
B)	15%
C)	17%
D)	19%

What is the WACC? (Round to the two decimal places.)
A)	16.48%
B)	15.64%
C)	14.24%
D)	13.36%

What is the NPV of this project and should Drozs Hiking Gear, Inc. invest in this project? (Round to the nearest dollar.)
A)	-$53,113, No
B)	$946,887, Yes
C)	$848,023, Yes
D)	-$45,167, No