Your boss wants to know the appropriate cost of capital for the project you may start in a couple of weeks. The project will be financed by Equity, $(2 500 000 + 5 000*N), and Debt, $(1 750 000 - 1 000*N). You know from previous research that the required return on Equity is 7.45%, the cost of Debt is 3.25%, the required return on Market is 6.5%, the tax rate for your company is 34%, and the risk-free rate in the economy is (0.4+N/100)%
A. State the method(s) you are going to use to answer the question your boss asked you. Explain why you are going to use the method(s)
B. Name the value you are going to find.
C. Compute it and discuss why you are computing the value using the methods you discussed in A.& B.
The AD&Co is debating a project to sell SHAPOKLJAKs. You are extremely optimistic about selling Shapokljak. The sales are expected to be (13 000 + 10*N) units for the first year of Shapokljak's production and 17 600 Shapokljaks per year for remaining 4 years out of 5 years of project life; after that the machinery will be discarded. The selling price of one Shapokljak is expected to be $149.95. Variable costs are $37.00 per Shapokljak and Fixed costs are $495 000 per year. The initial investment in the production, $4 650 000, can be depreciated along straight line to zero during the life of the project (assume no salvage value in 5 years). Required return on the project is 12.5%, taxes are 34% and there is no change in NWC. Market value of the stock of AD&Co as of today is $(57.13+N/100).
A. Your word is final: will you accept the project?
B. Why or why not?
C. State the method(s) you have used and explain why you have chosen to use the method(s). (assume expenses and taxes are paid and revenues are received at the end of each project’s year).
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