c) Company Y has 80 bonds outstanding that are selling at their par value of $1,000 each. Bonds with similar characteristics are yielding a pre- tax 8.0 per cent. The firm also has 5,000 shares of common stock outstanding. The stock has a beta of 1.4 and sells for $50 a share. The U.S. T-bill is yielding 5 per cent, the market risk premium is 6 per cent, and the firm's tax rate is 29 per cent. What is the firm's weighted average cost of capital assuming its earnings are sufficient to classify all interest as a tax-deductible expense? The firm is considering a project that has the same risk level as the firm's current operations, an initial cost of £250,000 and cash inflows of £50,000, £60,000, and £160,000 for Years 1, Year 2 and Year 5, respectively. What is the NPV of the project? Explain your calculations. Explain whether would you invest in this project? Under which conditions would you invest (using a maximum of 15 lines)?

c) Company Y has 80 bonds outstanding that are selling at their par value of $1,000 each. Bonds with similar characteristics are yielding a pre- tax 8.0 per cent. The firm also has 5,000 shares of common stock outstanding. The stock has a beta of 1.4 and sells for $50 a share. The U.S. T-bill is yielding 5 per cent, the market risk premium is 6 per cent, and the firm's tax rate is 29 per cent. What is the firm's weighted average cost of capital assuming its earnings are sufficient to classify all interest as a tax-deductible expense? The firm is considering a project that has the same risk level as the firm's current operations, an initial cost of £250,000 and cash inflows of £50,000, £60,000, and £160,000 for Years 1, Year 2 and Year 5, respectively. What is the NPV of the project? Explain your calculations. Explain whether would you invest in this project? Under which conditions would you invest (using a maximum of 15 lines)?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 17P

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