Tax figure for the cost of debt but not for cost of equity

Assignment Help Financial Management

Reference no: EM131992560

Day Shades Inc. (DSI) has 20,000 bonds issued and outstanding with a 10 percent coupon rate compounded semi-annually. These bonds have 13 years left to maturity and they currently sell for 104 percent of par value. The company has 5 million shares issued and outstanding with a market value of $3.85 per share. The company’s stock has a beta of 1.20. The expected return on the market is 11 percent and the yield on the risk-free asset is currently 6 percent. Year 0 Years 1 Year 2 Year 3 Year4 Year 5 Capital Expenses Working Capital Revenue Operating Expenses EBITDA D&A EBIT ×(1 - t) Net Income D&A Cash Flow from Operations Working Capital Free Cash Flows DSI is currently considering a new five-year expansion project that requires an initial investment of $3.8 million in fixed assets. At the end of the project, the fixed assets would be depreciated to zero over the project’s five year life. The fixed assets can be sold for $550,000. Additionally, DSI will need to make an initial investment of $300,000 in working capital for the project and an additional investment of $50,000 in every year thereafter. The project is expected to generate annual sales revenue of $2,945,000 with associated costs of $1,255,000. The annual tax rate for DSI is 36 percent.

A. Calculate the weighted average cost of capital (WACC) for DSI.

B. Using the projected after-tax cash flows for DSI, calculate and comment on the Net Present Value (NPV) of the project.

C. Under which circumstance can the WACC be used in investment appraisals

D. Why do we use an after tax figure for the cost of debt but not for the cost of equity?

Reference no: EM131992560

Questions Cloud

Falling interest rates : The impact of more capital from abroad entering the US bond market is. Falling interest rates. Financial managers need to analyze the yield curve in order to

You will lose money by investing in asset : Use the NORMDIST function in Excel® to determine the probability that in any given year you will lose money by investing in this asset.

What is the EPS for each of these plans : Gerrell Corp. is comparing two different capital structures. Assuming that the corporate tax rate is 40 percent, what is the EPS for each of these plans?

What is the bond yield-to-call at the present time : Four years ago you brought a 10 percent, 10-year bond that paid interest annually. what is the bond’s yield-to-call at the present time?

Tax figure for the cost of debt but not for cost of equity : Calculate the weighted average cost of capital (WACC) for DSI. Why do we use an after tax figure for the cost of debt but not for the cost of equity?

Calculate the effective net interest for each capital flow : Calculate the effective net interest for each capital flow. What is the best alternative?

Charity patients does the organization treat per month : How many charity patients does the organization treat per month? What is grand total of payments that Commercial Insurer pays for all of its patients in a month

Company stock price is due to systematic or marketwide risks : As we have seen much of the volatility in a company’s stock price is due to systematic or marketwide risks.

Promising to pay remainder of cost in semiannual payments : John Fare purchased $18,000 worth of equipment by making a $3000 down payment and promising to pay the remainder of the cost in semiannual payments

User Account

All Pages