Question 23: (12 marks)

A firm is thinking about launching a new product.The initial investment in equipment is $600,000.The project has an estimated life of five years.The revenue per year is estimated to be $400,000, and operating costs per year is estimated to be $200,000.

The investment in the net working capital will be $40,000 at the beginning of the project; 40% of this will be recovered at the end of year 4, and the rest at the end of year 5.The tax rate is 30% and the CCA rate for depreciation purposes is 20%.The equipment can be sold at the end of the project for $60,000.

There is an on-going feasibility study regarding the project.The feasibility study is done by ACDT Consulting Group.They have been paid $50,000 a year ago, and they will be paid another $50,000 today. The cost of capital for the project is 10%.Calculate the NPV of the project to see if the company should undertake this project

Question 24 (12 points)

You have been given the task of calculating the WACC of ABC Inc. You will use the following information to calculate the WACC.

The firm has 3000 coupon paying bonds outstanding. Each coupon-paying bond has a face value of $1000, will mature 10 years from today, and is currently priced at 130% of the face value. The annual coupon rate is 12%, and coupon is paid on an annual basis.

The company has 500,000 common shares outstanding, and each share is currently trading at $12. You have decided to use CAPM to calculate the cost of equity. The risk-free rate is 5%, and the market risk premium is 5%. The equity beta of the company is 2.

Also, the company has 200,000 preferred shares. Each share is trading at $10, and the constant yearly preferred dividend per share is $1.2. Finally, the company faces a tax rate of 30%.