Question
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
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 seven 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%. (Mark 40, 8 for each sub-question)
(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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