Calculate the cost of debt

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Question - Sunny Inc. is trying to decide whether investing in Project A is a good idea. This project will last 5 years and will not exist after that. Any salvage value will be considered as additional cash flow to be added to the 5th year's free cash flow. The project requires a $1,000,000 initial investment (today) and has the following projected free cash flows. The project is expected to have a salvage value of $200,000 (at the end of 5th year)

Year 1:?? $300,000

Year 2:?? $350,000

Year 3: ??Nothing

Year 4: ??$450,000

Year 5: ??$250,000

Sunny Inc provides the additional information:

D/E ratio: 0.7

Tax Rate: 20%

Most recent bond with a face value of $1000 sold for $950. This bond pays yearly coupon payments and the coupon rate is 6%. The bond has a remaining maturity of 15 years.

The beta for Sunny Inc. is 2. The S&P 500 has an expected return of 12% and the t-bill is 3%. Calculate the Cost of Debt (not taking taxes into consideration).

Reference no: EM133004429

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