Bonds have par value of $1000 and are currently priced at $857.22 per 6% bond, paying interest annually and maturing in 11 years. The company’s stock has a Beta of 1.20, the return on the market is 15% and the risk free rate is 2%. The company has no preferred stock outstanding, nor any foreseeable intention of issuing preferred stock. It’s long-term targeted debt/equity ratio is 0.60. The company’s marginal tax rate is 40%.
Company wants you to evaluate purchase of new combine for $333,000 with shipping and installation adding $15,000 to the capital cost. The new equipment will be depreciated over 5 years on a straight-line basis; It is expected that it will be sold for $30,000 at the end of 5 years.
Company estimates the new combine will eliminate three workers, saving annual wages of $38,000 per worker.
1. What is after-tax cost of debt?
2. What is cost of common equity?
3. What is WACC?
4. What is the total initial investment for new combine?
5. What is net salvage value from sale of combine at the end of 5 years?
6. What is net OCF for the combin during each year 1-4?
7. What is the NPV of new combine investment?
8. Accept or Reject the new purchase?