Weights of 70 debt and 30 common equity no preferred equity

Reference no: EM13587291

Felicia & Fred’s executive board has asked you to change the decision model previously completed to reflect the following changes regarding increased leverage, WACC, and cash flows. It is your job to calculate the decision rules for NPV and IRR given the information provided.

Requirements:

1. Determine the new target weighted average cost of capital for Felicia & Fred, given following assumptions:

Weights of 70% debt and 30% common equity (no preferred equity); this essentially reverses their previously calculated capital structure
A 35% tax rate
The cost of debt is now 10% due to an additional default risk premium
The beta of the company is 1.3
The risk free rate is 2%
The return on the market is 12%

Use the CAPM for calculation of the cost of equity.

2. Calculate the cash flows for the new crystal jewelry project given the following assumptions:

Initial investment outlay of $25 million, comprised of $20 million for machinery with $2 million for net working capital for metal inventory and $3 million for crystals
Project and equipment life is 5 years
Revenues are expected to increase $12 million annually
Gross margin percentage is 40% (not including depreciation)
Depreciation is computed at the straight-line rate for tax purposes
Selling, general, and administrative expenses are 5% of sales
Tax rate is 35%

Compute net present value and internal rate of return of the project.

Felicia & Fred's executive board has asked you to change the decision model previously completed to reflect the following changes regarding increased leverage, WACC, and cash flows. It is your job to calculate the decision rules for NPV and IRR given the information provided.

Requirements:

1. Determine the new target weighted average cost of capital for Felicia & Fred, given following assumptions:

Weights of 70% debt and 30% common equity (no preferred equity); this essentially reverses their previously calculated capital structure
A 35% tax rate
The cost of debt is now 10% due to an additional default risk premium
The beta of the company is 1.3
The risk free rate is 2%
The return on the market is 12%

Use the CAPM for calculation of the cost of equity.

2. Calculate the cash flows for the new crystal jewelry project given the following assumptions:

Initial investment outlay of $25 million, comprised of $20 million for machinery with $2 million for net working capital for metal inventory and $3 million for crystals
Project and equipment life is 5 years
Revenues are expected to increase $12 million annually
Gross margin percentage is 40% (not including depreciation)
Depreciation is computed at the straight-line rate for tax purposes
Selling, general, and administrative expenses are 5% of sales
Tax rate is 35%

Compute net present value and internal rate of return of the project.

Reference no: EM13587291

Questions Cloud

An equilibrium mixture of this reaction at a certain : question consider the following reactioncog2h2glt-gtch3ohgan equilibrium mixture of this reaction at a certain

How does temperature affect the extent of dissociation of : how does temperature affect the extent of dissociation of

Willis corporation has beginning inventory 76000 purchases : willis corporation has beginning inventory 76000 purchases 487000 freight-in 15900 purchase returns 5400 purchase

Depreciation recorded on plant and equipment 28000 : hudson company uses a job-order costing system. the following transactions took place last yeara. raw materials were

Weights of 70 debt and 30 common equity no preferred equity : felicia amp fredrsquos executive board has asked you to change the decision model previously completed to reflect the

You have have a buffer solution composed of 400 mol of acid : you have have a buffer solution composed of 4.00 mol of acid and 1.75 mol of the conjugate base. if the pka of the acid

If the company has a 10 after tax weighted average cost of : 1. basic capital budgeting problem with straight line depreciation. the roberts company has cash inflows of 140000 per

Describe in detail the effect of increasing torqueload on : describe in detail the effect of increasing torqueload on the excitation current armature current and output power as

A racquetball court is 20 ft wide if we consider only : a racquetball court is 20 ft wide. if we consider only motion along this direction and treat the ball as a particle in

User Account

All Pages