Reference no: EM133129031

Question - A five year project will require an investment of $100 million. This comprises of plant and machinery worth $80 million and a net working capital of of $20 million. The entire outlay will be incurred at the project's commencement.

Financing for the project has been arranged as follows:

80000 new common shares are issued, The market price of which is $500 per share. These share will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9% per year for an indefinite tenure.

Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having a face value of $1000. These bonds have a market value of $1150 each.

At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the net working capital will be liquidated at its book value.

The project is expected to increase revenue of the firm by $120 million per year. Expenses other than depreciation, interest and tax , will amount to $80 million per year. The firm is subject to a tax rate of 30%.

Plant and machinery will be depreciated at the rate of 25% per year as per the written-down-value method.

Required -

1. Compute the cost of equity for this project?

2. Compute the relevant cost of debt for this project.

3. Compute the WACC.

4. Determine the initial cash flow for the project.

5. Determine the earnings before taxes for years 1 through 5.

6. Compute the OCF for years 1 through 5.

7. Compute the terminal cash flow.

8. Compute the FCF for years 1 through 5.

9. Compute the project's NPV and IRR.

10. Should the project be accepted or rejected?