1. A business consulting firm, Ferguson and Co, has the following capital structure.
a. Calculate WACC for the company, assuming the capital structure is 30% debt/70% equity, tax rate = 40%, debt coupon rate = 5%, risk premium for equity
= 6%, dividend yield =4%, company beta = 1.2, government T-bond rate = 3%.
b. Using the discount rate calculated from the above, which project should the company invest in, if they can only invest in one of them? Please calculate the
NPV and IRR
Year 0 -100k -100k
Year 1 +35k +80k
Year 2 +35k +30k
Year 3 +35k +15k
Year 4 +35k +15k
Which project has a higher NPV? Which project has a higher IRR? Should the company always invest in the project with the highest NPV? Why and why not?
c. Often the discount rate used for NPV analysis is higher than the WACC. Now assuming that the discount rate is twice as much as WACC, which project should
the company invest in based on NPV/IRR analysis? Does it change the decision? Please explain.