Stamford Ltd has 4 million shares outstanding. The current share price is R15 per share. The beta coefficient for the shares of Stamford Ltd is equal to 1.21. The historical market risk premium is 8.5%. The market value of debt capital is currently R24 million and the cost of debt capital for Stamford Ltd is 11%. The current capital structure of Stamford Ltd is regarded as optimal by the CEO. The corporate tax rate is 34% and the Treasury bill rate is 7%. Stamford Ltd is considering a project that costs R27.5 million. The expected pre-tax earnings are R9 million per year for 5 years. Investing in the project will not alter the firm’s risk level. Evaluate the project using the WACC method.
Stamford Ltd has 4 million shares outstanding. The current share price is R15 per share. The beta coefficient for the shares of Stamford Ltd is equal to 1.21. The historical market risk premium is 8.5%. The market value of debt capital is currently R24 million and the cost of debt capital for Stamford Ltd is 11%. The current capital structure of Stamford Ltd is regarded as optimal by the CEO. The corporate tax rate is 34% and the Treasury bill rate is 7%. Stamford Ltd is considering a project that costs R27.5 million. The expected pre-tax earnings are R9 million per year for 5 years. Investing in the project will not alter the firm’s risk level. Evaluate the project using the WACC method.
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 4P
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Stamford Ltd has 4 million shares outstanding. The current share price is R15 per share. The beta coefficient for the shares of Stamford Ltd is equal to 1.21. The historical market risk premium is 8.5%. The market value of debt capital is currently R24 million and the cost of debt capital for Stamford Ltd is 11%. The current capital structure of Stamford Ltd is regarded as optimal by the CEO. The corporate tax rate is 34% and the Treasury bill rate is 7%. Stamford Ltd is considering a project that costs R27.5 million. The expected pre-tax earnings are R9 million per year for 5 years. Investing in the project will not alter the firm’s risk level.
Evaluate the project using the WACC method.
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