1. Determine the new target weighted average cost of capital for Felicia & Fred, given following assumptions:
Weights of 70% debt and 30% common equity (no preferred equity); this essentially reverses their previously calculated capital structure
A 35% tax rate
The cost of debt is now 10% due to an additional default risk premium
The beta of the company is 1.3
The risk free rate is 2%
The return on the market is 12%.
Use the CAPM for calculation of the cost of equity.
2. Calculate the cash flows for the new crystal jewellery project given the following assumptions:
Initial investment outlay of $25 million, comprised of $20 million for machinery with $2 million for net working capital for metal inventory and $3 million for crystals
Project and equipment life is 5 years
Revenues are expected to increase $25 million annually
Gross margin percentage is 40% (not including depreciation)
Depreciation is computed at the straight-line rate for tax purposes
Selling, general, and administrative expenses are 5% of sales
Tax rate is 35%
Compute net present value and internal rate of return of the project.