Solution-Calculate the weighted average cost of capital

Calculate the weighted average cost of capital hint to get

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Ember is considering an investment of $40 million in plant and machinery. This is expected to produce free cash flows of $13 million in year 1, $14 million in year 2, $15 million in year 3, and 25 million in year 4. The tax rate is 35%. You don't know the target capital structure, but you do have the following information:

· Bonds: There are 37,000 bonds with a 5.5% coupon outstanding. The coupons are paid annually. The bonds have a 1000 face value and 8 years to maturity. They sell for 96.7% of par.

·Retained Earnings (Internal Equity): There are 950,000 shares outstanding with a price of $55 per share. The beta on the stock is 1.25. The risk-free rate is 2% and the market risk premium is 6%.

a) Calculate the weighted average cost of capital. Hint: To get the weights, you will need to solve for the market value of the debt and equity.

b) Calculate the net present value (NPV) with the WACC. Should they invest? Why or why not?

Reference no: EM13478754

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Calculate the weighted average cost of capital hint to get

Reference no: EM13478754

Reference no: EM13478754

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