Question
The capital structure of a firm consists of debt and equity. The firm has 100,000 bonds outstanding that are selling at par value. The par
The capital structure of a firm consists of debt and equity. The firm has 100,000 bonds outstanding that are selling at par value. The par value of the bonds is $1,000. Bonds with similar characteristics are yielding a before-tax return of 7%. The company also has 5 million shares of common stock outstanding. The stock has a beta of 1.30 and sells for $50 a share. The rate of return on U.S. Treasury bills is 5% and the market rate of return is 11 percent. The firms tax rate is 25%. a) Find the companys weighted average cost of capital (WACC or RWACC). b) The firm is considering a new project that is expected to generate annual net after-tax cash flows of $2 million for five years. The project requires an initial investment of $5 million. It has the same risk as the overall firm. Assume no net working capital requirement and no salvage value. Find the net present value (NPV) of the project.
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