Question
You recently went to work for CTC Components Company, a supplier of auto repair parts used in the after-market with products from Daimler AG, Ford,
You recently went to work for CTC Components Company, a supplier of auto repair parts used in the after-market with products from Daimler AG, Ford, Toyota, and other automakers. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows of a proposed project.
Cost of the project: $200,000
Year | After tax Cash flow |
1 | $45,000 |
2 | $45,000 |
3 | $45,000 |
4 | $45,000 |
5 | $45,000 |
CTCs assets are $750 million, financed through bank loans, bonds, preferred stocks, and common stocks. Tax rate is 40 percent. The amounts are as follows:
Bank loans: $ 100 million borrowed at 3%
Bonds: $280 million, paying 5% coupon with semi-annual payments, and maturity of 10 years. CTC sold its $1,000 par-value bonds for $1050 and had to incur $50 flotation cost per bond.
Preferred Stocks: $120 million, paying $15 dividends per share. CTC sold its preferred shares for $210 and had to incur $10/share flotation cost.
Common Stocks: $250 million, beta is 2, the risk-free rate is 2 percent, and the market rate is 6%.
- What is the after-tax cost of the loans?
- What is the after-tax cost of the bonds?
- What is the after-tax cost of the preferred stocks?
- What is the after-tax cost of the common stocks?
- Calculate the cost of capital. Please show your work precisely by indicating each component and weight.
- Calculate the NPV, IRR, and payback period of the project. Use the cost of capital you found in e when calculating the NPV and IRR. Should you accept or reject the project? Why?
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