Should the firm invest in an average-risk project

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Reference no: EM13933099

Company ABC has 3-year bonds outstanding. The bond’s coupon rate is 10% and it is selling at $1,000. The total value of the bonds is $10M. The company also has preferred stocks, which are worth $5M. The preferred stock pays a dividend of $2 a share and currently sells at $20 a share. The common stocks of the company are worth $20M. The beta of the common stock is .8, the market risk premium is 10%, the risk free rate is 6%, and the firm’s tax rate is 40%.

(1) What is the company’s WACC?

(2) If an average-risk project will produce a 10% rate of return, should the firm carry out the project? Explain.

(3) Should the firm invest in an average-risk project that will require an initial investment $1M and provide an annual cash flow of $100k for 15 years? Explain.

(4) How much should the firm pay for an average-risk project that will generate the following annual cash flows for five years: CF1 = 200, CF2 = 300, CF3 = 400, CF4 = 500, CF5 = 800.

Reference no: EM13933099

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