Case Scenario: Boston Inc is looking to raise Capital for project, and they have a few options in mind. You are given the following information to help you determine the WACC.
1. Boston Inc currently has outstanding 12% Coupon bonds that are selling for $1250.00. They pay interest Semi-Annually They have a par value of $1000, and they mature in 10 Years.
2. They have preferred stock that has a par value of $75.00 and they pay a 7.5% dividend. This stock is currently selling for $82.00.
3. Their dividends, and stock price are expected to grow at 8% per year in the future. Their common stock is currently selling for $32.00 a share, and its last dividend was $2.50. Their common stock has a beta of 1.3. The Risk Free rate is 5.2%. The expected market return is 14.12%.
Calculate the WACC for Boston Inc assuming they have a combined Federal and State tax rate of 40%. For the cost of common equity I want you to take the average return of the following two methods: DCF, and CAPM. Their target capital structure is 38% Debt, 22% Preferred Stock, and 40% Common Equity.
What is their WACC?
The two projects that they are looking at are creatively called Project A which has an initial cost of $57,500, and its expected net cash inflows are $11,500 for the next 8 years, and Project B which has an initial Cost of $110,000 and the following cash flows: Years 1-3 $20,000. Years 4-7 $28,000 Years 8 $18,000. Use the WACC from question 1.
What is the NPV, IRR, MIRR, PI, Payback, and Discounted Payback.
Another option for Boston Inc is a project that has a forecasted sales revenue of $30000 and is estimated to grow by 3% over the life of the project which is 3 years. The initial cost of the project is $50,000 and will be depreciated using the MACRS method over its 3 year life. The equipment could be sold for $10,000 at the end of year 3. The MACRS rates are (.33, .45, .15 and .07). The marginal tax rate is 35%, and their cost of capital is 12%. Calculate the project's NPV, and IRR. Use the following to fill in the information.