Question

Problem 18-13 WACC First and Ten Corporation's stock returns have a covariance with the market portfolio of .0516. The standard deviation of the returns on the market portfolio is 21 percent and the expected market risk premium is 6.3 percent. The company has bonds outstanding with a total market value of $57 million and a yield to maturity of 6.6 percent. The company also has 6.2 million shares of common stock outstanding, each selling for $31. The company's CEO considers the firm's current debt-equity ratio optimal. The corporate tax rate is 25 percent and Treasury bills currently yield 4.6 percent. The company is considering the purchase of additional equipment that would cost $59 million. The expected unlevered cash flows from the equipment are $19.4 million per year for 5 years. Purchasing the equipment will not change the risk level of the firm. Calculate the NPV of the project. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) NPV

Answer 1

we have to fost find out ware for that there have to central WACC - Wexke & Wd xkd. calculation of ke ke = Rf + B [Rm-Rf] where Rf a risk free rate B. beta Rm-2mouket sisk Premium con calculation sering the Jaloving pasula $ covariancefecant, marted} amet given standard deviation of market [omkt] = 21%. Be 0.0516 (0. 22 :-) 1.1700680272 ke = 4.6 + 117006802721 [ - 11.9714285714). ko = yield to maturity - 6:6%. after tom cost of debt 6,6% [1-254.] =) 4.954.

6.2 million shore) x 3) mcorket vake of debt = $57 million market value of equity - 6.21 =) 192.2 million WACC = x 4.961: 192.2 x 11.9714285714%. + 57 249.2 249.2 =) 110.3654035 771 7.) ( the - company is consydering the purchase of additional equipment that initial out flow a 59 million & so inlevered cash flow per year $19.4 million. Anot for 5 years annut present value of mlevered cosh flow's = 19.48 annits factor of 10.365403577). calculation of annuity factor it-u------ 1+10.365403577 - 1+10.3654635771 ) 3.75566402)33

19.4 x 3.75566402133 present value of = inlevered cash flows -) 72.85988.20138 millions. NPV = present value of - initial outflow unlevered cash flows - 72.8598820)38 - 59 =) $ 13.8598820)38 millions. =) $ 1,38,59, 862.0138 round off to a decimals - $ 1,38,59, 882.01)