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You have just been hired to compute the cost of capital for debt, preferred stock, and common stock for the Mindflex Corporation . Cost of
You have just been hired to compute the cost of capital for debt, preferred stock, and common stock for the Mindflex Corporation.
- Cost of common equity: Mindflexs common stock paid a $1.25 dividend last year. In addition, Mindflexs dividends are growing at a rate of 6 percent per year and this growth rate is expected to continue into the foreseeable future. The price of this stock is currently $30.
- Cost of debt: Assume that Mindflexs bonds are frequently traded. A Mindflex bond has a $1,000 par value (face value) and a coupon interest rate of 11 percent that is paid semiannually. The bonds are currently selling for $1,125 and will mature in 12 years. Mindflexs corporate tax rate is 34 percent.
- Cost of preferred stock: Mindflexs preferred stock pays a 10 percent dividend on a $125 par value. However, the market price at which the preferred shares could be sold is only $90.
- Mindflex is proposing a project
- That would initially cost $945,000 with 3 Year MACRS depreciation. The Cost of installation and transportation is $17,000.
- Revenues are expected initially to be based on sales of 9,500 units at a price of $175 per unit. Sales would grow at 7.2% for the first 2 years, 2.5% for the next three years.
- Annual Fixed costs are $150,000. Variable costs $95 per unit and decrease by 3.5% from year 2 through Year 5 of the project
- The Capital Structure of the firm is 40% Common Equity, 25% Preferred Stock and 35% Debt
Problem:
Calculate the Weighted Average Cost of Capital to evaluate this project
Calculate the Annual Net Cash Flows for this project, using a spreadsheet
Considering the Weighted Average Cost of Capital, should this project be accepted or rejected? Show your work
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