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Stag corp has a capital structure which is based on 50% common stock, 20% preferred stock...

Stag corp has a capital structure which is based on 50% common stock, 20% preferred stock and 30% debt. The cost of common stock is 14%, the cost of preferred stock is 8% and the pre-tax cost of debt is 10%. The firm's tax rate is 40%. (1 mark)
a. Calculate the WACC of the firm.
b. The firm is considering a project that is equally as risky as the firm's current operations. This project has initial costs of $280,000 and annual cash inflows of $66,000, $320,000, and $133,000 over the next three years, respectively. What is the net present value of this project ?

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Answer #1

The WACC of the firm is :

= wieght of debt * after tax cost of debt + weight of equity* cost of equity + weight of preferred stock*cost of preferred stock

= 0.3*0.1*0.6 + 0.5*0.14 + 0.2*0.08

= 0.018 + 0.07 + 0.016

= 10.4%

The CF0 = ($280,000)

CF1 = $66,000

CF2= $320,000

CF3= $133,000

The WACC of the firm would be = 10.4%

= ($280,000) + $66,000/(1.104)^1 + $320,000/ (1.104)^2 + $133,000/ (1.104)^3

So, the NPV is : $141,175.1524

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