Question
You are hired as a consultant and provided with the following information regarding WolfPac Co. The company currently has 100,000 share of common stocks trading
You are hired as a consultant and provided with the following information regarding WolfPac Co.
The company currently has 100,000 share of common stocks trading at a price of $60. The expected return is 18%.
The company's current debt (book value) is $4 million and was $6 million the year before. The interest paid during last year was $450,000.
The company had $4,000,000 last year in pre-tax profit, and paid tax of $1,000,000.
(1) What is the company's WACC?
(2) What is your suggestion to the company about a new project that requires investment of $380,000 and generates annual cash flow of $70,000 for the next 10 years? (Create the project's cash flow stream!)
(3) Show and explain how your answer to part (2) changes if the tax rate changes from 0% to 50% by 10%.
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