The preferred stock price per share is $40 and pays a $2 dividend. Common stock shares sell for $20 and pay a $2 dividend. Dividends for common stock are expected to grow by 1%. Bond price is $960, and the bond coupon rate is 5.5%. The bonds mature in 6 years.
The preferred stock price per share is $40 and pays a $2 dividend. Common stock shares sell for $20 and pay a $2 dividend. Dividends for common stock are expected to grow by 1%. Bond price is $960, and the bond coupon rate is 5.5%. The bonds mature in 6 years.
Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
7th Edition
ISBN:9780357033609
Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Chapter12: Investing In Stocks And Bonds
Section: Chapter Questions
Problem 4FPE: The Castle Company recently reported net profits after taxes of $15.8 million. It has 2.5 million...
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Transcribed Image Text:A firm has the following capital structure:
1. Bonds with market value of $2,000,000
2. Preferred Stock with a market value of $700,000
3. Common stock, of which 100,000 shares is outstanding. Presently, each common stock
is selling at $20 per share
The preferred stock price per share is $40 and pays a $2
dividend. Common stock shares sell for $20 and pay a $2 dividend. Dividends for common
stock are expected to grow by 1%. Bond price is $960, and the bond coupon rate is 5.5%. The
bonds mature in 6 years.
The firm's tax rate is 38%. The company has $2,000,000 in sales, and expenses of $1,100,000.
The initial investment of $5,000,000 will be depreciated straight-line over 10 years. The project
is expected to last 10 years.
1. What is the firm's Weighted Average Cost of Capital (WACC)?
2. What is the firm's Operating Cash Flow (OCF)?
3. Using the WACC is the NPV, using the WACC (use the answer from question 1 above).
and OCF (use the answer from question 2 above)?
4. Based on your answer to question #3, would you accept or reject the project? Explain
why?
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