Ember is considering an investment of 40 million in plant

Reference no: EM13380677

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.

c) Should they invest? Why or why not?

Reference no: EM13380677

Questions Cloud

Question 1 seattle health plans currently uses zero debt : question 1 seattle health plans currently uses zero debt financing. its operating income ebit is 1 million and it pays

Topic central banks and banking systems of other : topic central banks and banking systems of other countries--i would like this paper done on the central bank of sweden

Question 1the firm wants to diversify with a new product : question 1the firm wants to diversify with a new product line. the project requires an initial investment of 8000000

This is an mampm world with corporate taxes sci-fi is : this is an mampm world with corporate taxes. sci-fi is originally all equity financed unlevered. all earnings are paid

Ember is considering an investment of 40 million in plant : ember is considering an investment of 40 million in plant and machinery.nbsp this is expected to produce free cash

Question 1you invest 30 in ham and 70 in cheesenbspnbspnbsp : question 1you invest 30 in ham and 70 in cheese.nbspnbspnbsp timehamcheese1-.04.112.15.413.21-.134.18.39find the return

1a firm has an asset beta of 1 and a company cost of : 1.a firm has an asset beta of 1 and a company cost of capital of 15. a new project comes along with a beta of .2 and

Solve using excel formulas preferred or clearly write out : solve using excel formulas preferred or clearly write out the steps you took to calculate your answers. round any

Solve using excel formulas preferred or clearly write out : solve using excel formulas preferred or clearly write out the steps you took to calculate your answers.nbspnbsp round

User Account

All Pages