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Problem - As the CFO of Icecorps, you are calculating the cost of capital for Icecorps' projects. Icecorps has 3,000 bonds outstanding that mature in 20 years. Each bond is traded at $1,000. Each bond pays a semi-annual coupon at a rate of 8% per annum, with the effective pre-tax cost of debt of 6%.
Icecorps has 100,000 ordinary shares outstanding at a price of $40 per share. The firm has just paid $3 dividend per share. Dividends are expected to continue growing at a rate of 4% per year into the indefinite future. The firm's tax rate is 30%.
Icecorps is considering a project that requires an initial investment of $2.5 million. You estimate that the project's free cash flows will be $0.15 million per year in perpetuity. You consider the after-tax weighted average cost of capital as the proper discount rate to evaluate this project.
Required -
(a) What is the Net Present Value (NPV) of the project? Explain.
(b) Should the firm accept the project? Explain.
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