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Your company is asking you as a CFO to consider your capital costs for your long term investment projects. As you collect the recent capital
Your company is asking you as a CFO to consider your capital costs for your long term investment projects. As you collect the recent capital information as the follows: Your Company needs to purchase new machine to meet the demand for its product. The cost of the equipment is $250,000. It is estimated that the firm will increase operating cash flow (OCF) by $40,000 annually for the next 10 years. The firm is financed with 30% debt and 70% equity, both based on market values. The firm's cost of equity is 10% and its pre-tax cost of debt is 8%. The flotation costs of debt and equity are 4% and 6%, respectively. Assume the firm's tax rate is 30%. (A) What is the firm's WACC? (B) Ignoring flotation costs, what is the NPV of the proposed project? (C) What is the weighted average flotation cost, fA, for the firm? (D) What is the dollar flotation cost of the proposed financing? (E) After considering flotation costs, what is the NPV of the proposed project
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