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Techno barns would like to invest in new chain of barns, which will require a $1,500,000 initial cash outlay. The barn chain is expected to provide after-tax annual cash savings of $100,000 in year 1, $250,000 in year 2, $350,000 in year 3 and $450,000 in every year 4. The restaurant chain has weighted average cost of capital of 12 percent. For this project, the president, intends to provide $600,000 from a new debt issue $600,000 from a new issue of common stock. The balance of the financing would be provided internally by retaining earnings. The present value of the after-tax flotation costs on the debt issue amount to 8 percent of the total debt raised, whereas flotation costs on the new common stock issue come to 16 percent of the issue.
Required:
a. Calculate debt flotation cost and common stock flotation cost?
b. What is the net present value of the project after adjustment of flotation costs?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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