Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

This is all one question, please help solve each part! Casper's is analyzing a proposed expansion project that is much riskier than the firm's current

This is all one question, please help solve each part!

image text in transcribed

Casper's is analyzing a proposed expansion project that is much riskier than the firm's current projects. Thus, the project will be assigned a discount rate equal to the firms cost of capital minus 2 percent. The proposed project has an initial cost of $80 million dollars that will depreciate on a straight-line basis over 10 years. The project also requires additional inventory of $500,000 over the projects life. Management estimates the facility will generate an operating cash flow (OCF) of $12 million a year over its 10-year life. After 10 years, the company plans to sell the facility for an estimated $8 million. The company has 100,000 shares of common stock outstanding at a market price of $100 a share. Next year, this stock will pay an annual dividend of $1.50 a share. The dividend is expected to increase by 3.5 percent annually. The firm also has 10,000 shares of 10 percent preferred stock with a market value of $90 a share. The preferred stock has a par value of $100. The company has a 7 percent, semiannual coupon bond issue outstanding with a total face value of $1.2 million. The bonds are currently priced at 95 percent of face value and mature in 8 years. The tax rate is 34 percent. What is the total value of Casper? $12,040,000 $10,030 000 $8,020,000 $6,010,000 $4,000,000 calculate the appropriate cost of debt (rounded to the nearest tenth percent). 11.11 percent 5.17 percent 3.93 percent 10.34 percent 7.85 percent Calculate this project's WACC (rounded to the nearest tenth percent). 3.61 percent 4.61 percent 5.61 percent 6.61 percent 7.61 percent Should the firm pursue the expansion project at this time? Why or why not? Yes, because the NPV is $12,787,952 Yes, because the NPV is $22,787,952 No, because the NPV is -$2,787 952 No, because the NPV is -$12,787 952 No, because the NPV is -$22,787,952

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Industrializing Financial Services With DevOps

Authors: Spyridon Maniotis

1st Edition

1804614343, 978-1804614341

More Books

Students also viewed these Finance questions

Question

What are the attributes of a technical decision?

Answered: 1 week ago

Question

How do the two components of this theory work together?

Answered: 1 week ago