Kro Ltd has designed a new product and conducted a market survey to assess its viability. The survey has determined that the new product will generate sales of $9 million per year. Annual total cost (excluding depreciation expense) will come to $1.2 million. The equipment necessary for production will cost $8 million and is to be depreciated evenly over the project’s life of 4 years (straight-line method). At the end of 4 years, the equipment has a zero scrap value. The tax rate is 30%. The company believes the project is considered to be of similar risk to the company’s existing assets. Kro’s capital consists of the following: Ordinary Shares: The company has 1.5 million ordinary shares outstanding, currently sell for $50 per share and has a beta of 1.6. The market portfolio return is 17% and the risk-free rate is 5% Preference Shares: The company has 200,000 preference shares, which currently sell for $45 and pay a $5 dividend per year. Bonds: The company has 150,000 bonds outstanding that mature in 5 years with an annual coupon of 7.5%, making yearly payments. The bonds have a face value of $1,000 and currently sell in the market for $1080. Therefore, the YTM is 6%. Calculate Kro’s weighted average cost of capital(WACC). Using the NPV criterion, should the project goahead?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 22P: The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500,...

See similar textbooks

Related questions

Question

Kro Ltd has designed a new product and conducted a market survey to assess its viability. The survey has determined that the new product will generate sales of $9 million per year. Annual total cost (excluding depreciation expense) will come to $1.2 million. The equipment necessary for production will cost $8 million and is to be depreciated evenly over the project’s life of 4 years (straight-line method). At the end of 4 years, the equipment has a zero scrap value. The tax rate is 30%. The company believes the project is considered to be of similar risk to the company’s existing assets.

Kro’s capital consists of the following:

Ordinary Shares:

The company has 1.5 million ordinary shares outstanding, currently sell for

$50 per share and has a beta of 1.6. The market portfolio return is 17% and the risk-free rate is 5%

Preference Shares:

The company has 200,000 preference shares, which currently sell for $45 and pay a $5 dividend per year.

Bonds:

The company has 150,000 bonds outstanding that mature in 5 years with an annual coupon of 7.5%, making yearly payments. The bonds have a face value of $1,000 and currently sell in the market for $1080. Therefore, the YTM is 6%.

Calculate Kro’s weighted average cost of capital(WACC).

Using the NPV criterion, should the project goahead?

Expert Solution