QUESTION 5

Consider the following information on Southern Sugar Manufacturing (SSM):

The companys bond (long-term debt) is currently selling for $1,100.00. It matures in 10 years, pays interest annually and has a 10% coupon payment. Bonds par value is $1,000.00.

SSM last dividend per share was $1.10. The common stock now sells for $25.00 per share. The expected growth rate for the company is 7% for some foreseeable future.

Assume the following:

• Capital structure consists of 30% Debt and 70% Common Equity.
• SSM tax rate is 40%.

What is the companys weighted average cost of capital? (Use 2-decimal places in your calculation)

[Total: 8 marks]

QUESTION 6

Sushi Food is considering the purchase of a new machine for its expansion. Its finance manager has developed the following after-tax cash flows forecast.

Year 0: Total investment = $21,000

Year 1: Net cash flow = $5,900

Year 2: Net cash flow = $6,100

Year 3: Net cash flow = $6,250

Year 4: Net cash flow = $6,600

Year 5: Net cash flow = $6,800

If the required rate of return is 12%, should Sushi Food proceed with the expansion plan? [Use Net Present Value (NPV) and Internal Rate of Return (IRR) to decide]

Use 2-decimal places in your calculation.

[Total: 10 marks]