Your firm has 1 million shares of common stock each selling for $68.50 and the par value of bonds issued is $50 million but the bonds are currently priced at 98.25% of par. The bonds are 14 year semi-annual 6.2% coupon bonds. Your firm just paid a dividend of $2.12 per share and this is expected to increase by 8% each year. The tax rate is currently 30%. A project under consideration is expected to generate revenues of $1,000,000 per year over the next four years but requires an initial investment in fixed assets of $1.2 million and $150,000 invested in net working capital (which will be recovered). Revenues are expected to remain steady over the next four years and variable costs account for 54% of revenues. Fixed costs are anticipated to be $120,000 per year. The fixed asset has a useful life of four years and a salvage value of $200,000. Your firm will depreciate this asset using the straight-line method. To finance this project's initial costs your firm will need to issue new stocks and bonds. The flotation cost of equity is 8.4% and the flotation cost of debt is 6.1%
a) What are the capital structure weights for this firm?
b) What is the cost of equity?
c) What is the cost of debt?
d) What is this firm's WACC?
e) What is the weighted average flotation cost?
f) What is the initial costs including flotation costs?
g) What are the Cash Flows from Assets each year for this project?
h) Using NPV analysis how much value is created or destroyed by this project? Should your company accept or reject this project?