A firm has a Capital Structure as follows: 1. The market value of the bonds is $2,000,000, 2. The market value of the Preferred Stock is $1,000,000. 3. Firm has 500,000 shares of common stock (equity) outstanding, selling for $20 per share The preferred stock share price is $50 and which a $4 dividend. Each share of common stock sells for $20 and pays a $1.00 dividend, which is expected to grow by 2% per year. The price of the bonds is $818, and the coupon rate is 5%. The bonds will mature in 10 years. The firm’s tax rate is 40%. The company has $2,500,000 in sales, and expenses of $1,000,000. The initial investment of $5,000,000 will be depreciated straight-line over 10 years. The project is expected to last 10 years.
1. What is the firm’s WACC? ________________________________( to solve this question you must use the cost of preferred stock, cost of the common stock and cost of the bonds from Mini case 2-part 1)
2. What is the firm’s OCF ___________________________________
3. What is the NPV, using the WACC (use the answer from question 1 above), and OCF (use the answer from question 2 above)? ______________________
4. Based on your answer to question #3, will to accept the project?