Question 4

1. You have been asked to calculate the weighted average cost of capital for XYZ. The company has just paid a dividend of $3 which you envisage will continue to grow at 3% per year in perpetuity. It is currently trading for a price of $12.5 a share and there are 10000 shares on issue. The company also has one bond on issue that pays 7% coupons semi-annually and has a face value of $100,000. It will mature in 10 years and the current market yield is 3%. What is the WACC? (15 Marks)
2. The company is thinking about going ahead with a project that has an initial outlay of $100,000 (i.e. a negative cash flow) that will then return $40,000 (positive cash flows) per year for 5 years. If the appropriate cost of capital is the value calculated in A., what would the NPV of this project be? (5 Marks)