Question

A project will generate annual after-tax CFs of $1.2m for the next 4 years what is the project's NPV adjusted for flotation costs? ne the firm has a WACC of 14% and debt-to-equity ratio of .55. If flotation c equity qulity, For 15-17, assume Firm A has the following securities: Common stock: Price-s 48, div t-1)-$2.25, g-3%, 100m shares outstanding. -7% (semiannual coupons), Par-$1000, 13 yea Bonds: Price-$1000, cou outstanding. pon rate 15. (2 pts) Use the DCF approach to calculate the cost of common equity. 16, (2 pts) Assuming a tax rate of 40%, calculate the after-tax component c 7. (3 pts) Calculate Firm A's WACC.

Answer 1

a) Cost of equity, rs = D1 / P + g = 2.25 / 48 + 3% = 7.69%

b) Cost of debt, rd = coupon rate as the price of the bond is $1,000 = 7%

After-tax cost of debt = rd x (1 - tax) = 7% x (1 - 40%) = 4.20%

c) WACC = wd x rd x (1 - tax) + ws x rs

In order to wd and ws, which are weights of debt and equity, I need the bonds outstanding which are not available.

Value of equity, E = 100 x 48 = 4800 million

If bonds outstanding are 1 million, then D = 1 x 1000 = 1000 million

wd = 1000 / (1000 + 4800) and ws = 4800 / (1000 + 4800)