Question
You are the CFO of Sound Systems, Inc. The company has 200,000 shares of common stock outstanding at a market price of $37 a share.
You are the CFO of Sound Systems, Inc. The company has 200,000 shares of common stock outstanding at a market price of $37 a share. SS just paid an annual dividend in the amount of $2.20 per share. The dividend growth rate is 4% annually. SS also has 4,500 bonds outstanding with a face value of $1,000 per bond that are selling at 99 percent of par. The bonds have a 6% coupon, pay interest semi-annualy, and have 15 years to maturity. Finally, the firm has 25,000 shares of preferred stock outstanding at a market price of $45 a share. Preferred stocks pay dividend of 3.375% onpar value of $100.
The firm is considering a 3-year expansion project (same operations as the existing projects of the firm) that requires an initial investment in a machine of $100,000. The increase in Net Working Capital (NWC) is $5,000 that will be reduced to normal levels at the end of the project at time 3. The machine has a life of 4 years will be depreciated using straight-line method. The Net Income in the first year is $10,000 and this will grow at 4% a year. At the end of the project (year 3), the machine can be sold for $30,000. The firm's tax rate is 34%.
Find the common cost of equity?
Solve the course of preferred stock:
Solve for the before-tax & after-tax cost of debt:
Calculate the weights of equity, debt, and preferred stock:
What is the firm's weighted avg cost of capital (round to 2 digits):
What are the annual "cash flow from operations" in years 1, 2, & 3:
Compute the after-tax salvage value in year 3:
What are the free cash flows in years 0, 1, 2, & 3? (Hint: also consider NWC)
Calculate the NPV, IRR, MIRR (assuming the reinvestment rate is the same as WACC), profitability index (PI) Ratio, Payback period, and discounted payback period for the project:
Will you accept the project using the different criterions in the above question and why? Assume that the benchmarks for the payback period & discounted payback period are 2 & 2.5 years
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