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Your Company needs to purchase new machine to meet the demand for its product. The cost of the equipment is $310,000. It is estimated that the firm will increase operating cash flow (OCF) by $38,000 annually for the next seven years. The firm is financed with 40% debt and 60% equity, both based on market values. The firm's cost of equity is 8% and its pre-tax cost of debt is 6%. The flotation costs of debt and equity are 4% and 6%, respectively. Assume the firm's tax rate is 30%. (Mark 40, 8 for each sub-question)
(A) What is the firm's WACC?
(B) Ignoring flotation costs, what is the NPV of the proposed project?
(C) What is the weighted average flotation cost, fA, for the firm?
(D) What is the dollar flotation cost of the proposed financing?
(E) After considering flotation costs, what is the NPV of the proposed project?
What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)
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