Question
You have earned a position on the Board of Directors for my company. Here is what we are faced with: We believe there is a
You have earned a position on the Board of Directors for my company.
Here is what we are faced with:
We believe there is a smart investment decision out there to expand our manufacturing facility by making an initial investment of $80MM (That's right - lots of zero's $80,000,000). Our analysis has indicated there would be $22,500,000 in Operating cash inflows in each of the first 5 years (lots of new widgets we could build & sell if we expanded!!!!)
I need you to apply your FIN 305 & FIN 306 knowledge & start by:
- Determining our weighted average cost of capital.
- Find the IRR (It will be a whole number)
- Then make a recommendation to me as to whether we should ACCEPT this project or NOT (Our company's criteria for ACCEPTING a project is meeting or exceeding an IRR of 14%.)
Here is what I can share with you:
1) Our target capital strategy is
a) 58% Long Term Debt
b) 17% Preferred Stock
c) 25% Common Stock Equity
2) Our tax rate is 28%
3) Common stock equity:
a) Our current share price is $40
b) Last dividend paid was $2.
c) Our growth rate has been & is expected to stay steady at 5%.
d) Our company's risk (beta) has been rated at 0.65
e) The market return (Rm) is 13%
f) The risk free rate (Rf) has held steady at 8%
(Since we deliver a dividend, please AVERAGE the two equity costs (Gordon growth rate & CAPM) to determine the AVERAGE cost of equity for our company)
4) Preferred stock
a) We deliver a fixed dividend of $2.22
b) Our net proceeds from sale would be $28 per share
5) Long term debt
a) Our bonds are delivering (we are paying out) a yield/return of 9.5% to our bondholders
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started