Question:XYZ Corp. is considering an investment in Project Maverick. This new project requires a $5,000,000 initial investment and will produce annual net after tax cash flows according to the attached pro forma: (I have attached pro forma image)

This project will be financed internally. The project is as risky as the firm's current operations. The market values of the firm's equity and debt are $63 million and $37 million respectively.

Part 1:

Using the CAPM method, calculate the cost of equity.

Part 2:

Using the CAPM method, calculate the WAAC.

Part 3:

Using the CAPM method, calculate the NPV of this investment.

Part 4:

Calculate the Cost of Debt.

Part 5:

Using the DDM method, calculate the cost of equity.

Part 6:

Using the DDM method, calculate the WAAC.

Part 7:

Using the DDM method, calculate the NPV of the investment.

7 MY'Z Corporation : Project Maverick 2 Increase In Operating Cash Flows* $ 2.600,00.0.00 3 Annual Growth Rath of Operating Cash Flows 5. 546 4 Investment Cost 5. 1 1,000,000. 00 5 CCA Rate 3:046 Tax Rate 2546 Year B 4 Increase in Operating Cash Flows $ 2, 743,000.00 | | $ 2, 8.93, 865.00 $ 3. 053, 027.58| $ 3, 220.544.09 $ 3. 3.95. 096. 02 10 LESS CCA EXPENSE 5. 1, 650, 000. 00 $ 2, 805 , 0010.00 $ 1. 963. 500.00 $ 1, 374, 450.00 5 $52, 115.00 673. 480.50 1/1| Taxable Income 950, 000. 010 \- 5 62, 00.0.00 9:30. 365.00 $ 1, 678. 57 7.58\\ $ 2, 258.829. 09 $ 2, 724,615.52 12| Taxes Parable 237, 500. 010 15, 50,0.00 5 232.591.25 415, 644.39| 5 . 564, 707. 27 681, 153. 80 13. After - Tax Income* 712, 50 0. 00 - } 45, 50.0.0 0 5 697 , 773.75 $ 1 , 258, 93.3.18. $ 1 , 654, 121 . 82 $ 2.043. 461. 64 14 Add Back CCA 5 1, 650, 000. 00 $ 2,805, 0010.00 $ 1, 963. 50.0.010 $ 1, 374, 450.00 952, 115.00 5 673. 480. 50 5 15. Net Cash Flow - $ 11,00 0, 002.00 5 2, 362, 50 0. 00 | $ 2, 758, 50,0.00| 5 2, 651, 273.75 | $ 2, 633, 383. 18| $ 2, 656, 236. 82| $ 2,716.942.14 15 17 Market Value of Equity` 5. 56,DOO, 200 18 Market value of debt :* 5. 4 4.090, 200 15 Current yield on Canadian government T - Bills 1 . 25% / Risk - free rate ! 20 XY'Z's current stock price on the TMIX $17 . OO 21\ \Beta of XYZ's stock 1 . 44 22 \Last dividend paid ( per share !* 51. 8.5 23 \Expected dividend growth rate per annum* 24| Expected return on THX market portfolio 12 75 25 Corporate income tax rate 25 36 \CCA rate 27 *'Y'Z can Issue new debt at par with a 5^ premium over the risk - free rate 28