The Project Information:

The equipment will cost $680, is expected to have a working life of 4 years, and will be depreciated on a straight-line basis to a book value of zero. The equipment is expected to have a salvage value of $180 at the end of 4 years. The new equipment will improve efficiency and result in increased revenue of $870 in its first year of operation, but because of reduced efficiency from normal wear and tear, revenue will decrease by 3% (from the previous year's revenue) for each of the remaining 3 years of the equipment's life. Excluding maintenance, all other costs from operating the equipment will be $260 per year. Maintenance costs will amount to $140 in the equipment's first year of operation, and will then increase by $20 per year for the remaining 3 years of the equipment's life. The equipment will require additional net working capital of $190. The networking capital will be recovered in full after the equipment is sold at the end of its working life. The equipment will be installed in a building that is owned by the company but recently is not being used. If the project does not proceed, this building could be rented out for $190 per year. A feasibility study has been undertaken into the purchase of the new equipment. The cost of preparing the feasibility study was $200. The company has sufficient capital to undertake all positive-NVP projects. If the Payback Period method is used to evaluate projects, management's policy is that the maximum acceptable payback period is 3 years, and all cash flows in Year 0 would need to be recovered within 3 years for the project to be acceptable under this method.

Calculate:

a.Bank Loan (interest only): Before-tax cost of bank loan?

Market value of bank loan (value and weight)? (whole number)

b. Before-tax cost of mortgage loan?

Market value of mortgage loan? (value and weight)? (whole number)

c. Corporate Bonds

Credit Spread basis points?

Credit spread as a percentage (2 decimal places)

Risk-free rate to be used to calculate cost of corporate bonds? (3 decimal places)

Before-tax cost of corporate bonds

Face value of all bonds?

Coupon rate?

Number of years to maturity?

Total number of coupon payments remaining?

Total value of all coupon payments paid per year?

Value of each individual coupon payment?

Semi-annual yield (3 decimal places)?

Value of corporate bonds? (value and weight?)

d. Ordinary Shares:

Risk-free rate to be used to calculate cost of ordinary shares (3 decimal places)?

Beta?

Risk premium?

Cost of ordinary shares?

Dividend 1,2,3,4,5,6 years from now?

Price of ordinary shares?

Total market value of ordinary shares? (value and weight)?

e. Preference Shares

Preference dividend per share?

Preference share price?

Cost of preference shares?

Number of preference shares?

Total market value of preference shares?

f. Tax rate?

Weighted Cost of the Bank Loan (i.e. cost x weight)?

Weighted cost of the mortgage loan?

weighted cost of the corporate bonds?

weighted cost of the ordinary shares?

weighted cost of the preference shares?

Weighted Average Cost of Capital?

The data below are Credit Spread and Balance Sheet of the Company. The Melbourne's tax rate for the company is 30%, 10-year risk-free rate is 1.740% and 9-year risk-free rate is 1.630%.

B2 X V fx Rating Rating 1 yr 2 yr B yr 4 yr 5 yr 6 yr 7 yr AAA 126 8 yr 9 yr 156 10 yr 186 216 246 276 AA+ 306 135 336 165 366 195 225 396 255 285 AA 315 144 345 174 375 204 234 405 264 294 AA- 324 153 354 183 213 384 414 243 273 303 A+ 333 162 363 192 222 393 252 423 282 312 342 A 171 201 372 231 402 261 432 291 321 A- 351 180 381 210 411 240 441 270 300 330 BBB+ 360 189 219 390 420 249 450 279 309 339 BBB 369 198 228 399 429 258 459 288 318 348 BBB- 378 408 207 237 438 267 468 297 327 357 BB+ 387 216 246 417 276 447 477 306 336 366 BB 396 225 426 255 456 285 486 315 345 375 BB- 405 234 264 435 465 294 324 495 354 384 B+ 414 243 444 273 474 303 333 504 363 393 B 423 252 282 453 312 483 342 513 372 402 B- 432 261 462 291 321 492 351 522 381 411 441 CCC+ 270 471 300 330 501 531 360 390 420 CCC 450 279 480 309 510 339 540 369 399 429 CCC- 459 288 489 318 348 519 549 378 408 438 CC 468 297 498 327 528 357 558 387 417 447 C 477 306 336 507 366 537 567 396 426 456 486 516 546 576Balance Sheet as at 31/12/20 ASSETS LIABILITIES Notes Cash 150 Accounts payable 130 Accounts Receivable 180 Bank loan (interest only) 1 250 Inventory 610 Mortgage Loan 2 510 Property, plant & equipment 1,280 Corporate bonds 3 340 Total Assets 2,220 Total liabilities 1,230 SHAREHOLDERS' EQUITY Ordinary shares 4 450 Preference Shares 5 250 Retained earnings 290 Total shareholders' equity 990 Total liabilities and shareholders' equity 2,220 Notes 1. The interest rate on the bank loan is 8.6% p.a. 2. The interest rate on the mortgage loan is 5.8% p.a. 3. The corporate bonds have a credit rating of A and have 9 years to maturity. They make semi-annual coupon payments at a coupon rate of 7% p.a. The ordinary shares are shown on the balance sheet at their book value of $1 per share. They have a beta of 1.9. They are expected to pay a dividend of $0.05 next year. The dividend is expected to grow at a rate of 7% p.a. for the following 4 years, and after that it will grow at a constant rate of 3% p.a. in perpetuity. The preference shares have a par value of $1 each and are shown on the Balance Sheet at their par value. They pay a constant dividend of $0.11 and they are currently trading for $1.09. The risk premium for the ordinary shares is 8.7%