Question 5 (20 marks)

(ai) NHH Ltd. has a capital structure of 45% common stock, 20% preferred stock, and 35% debt. The financing costs for common stock, preferred stock and debt are 13%, 9% and 10%, respectively. Assume the relevant tax rate is 15%. Compute the WACC of NHH Ltd. (5 marks)

(aii) If NHH Ltd. is considering investing in a project which is more risky than the average of the firms existing projects, should the firm use the WACC as the discount rate for the projects cash flows? Briefly explain your answer. (3 marks)

(bi) If a project is financed by a $50m bond with 5% annual coupon, then the financing cost should be deducted from the projects cash flows when calculating the NPV of the project. Is the statement true or false? Briefly explain. (6 marks)

(bii) Determine if the following statements are true or false.

1) If the (depreciable) asset is fully-depreciated at the end of the project, the firm will receive pre-tax price for the sale of the asset. (3 marks)

2) To determine the contribution of the sale of an asset to the projects NPV, the present value of an annuity formula should be used. (3 marks)

please show the calculation steps