Blue Thumb’s stock has a beta of 1.2. The current t-bill yield (risk-free rate,Rf) is 5.5% and the expected return on the market portfolio (Rm) is 11.5%. The company’s preferred stock pays an $8.50 per share dividend each year and the price of it is $88 per share. The yield to maturity of Blue Thumb’s bonds is currently 9.7%. If Blue Thumb is in the 30% tax bracket, what is the company’s WACC?
Suppose Blue Thumb Tools is considering the introduction of a new, heavier hammer to be used for driving spikes. The new hammer will cost $490,000. The cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the new hammer can be scrapped for $40,000. The new hammer will save the firm $146,000 per year in pretax operating costs, and it required an initial investment in net working capital of $35,000. The tax rate of the firm is 30%. What are the cash flows of firm’s new project (using a time line)?
1. What is the net present value of this project (list your setups)?
2. What is the IRR of this project (list your setups)?