Bob\'s is retail chain of specialty hardware stores. The firm has 21,000 shares
ID: 2690997 • Letter: B
Question
Bob's is retail chain of specialty hardware stores. The firm has 21,000 shares of stock outstanding that are currently valued at $68 a share and provide a 13.2 percent rate of return. The firm also has 500 bonds outstanding that have a face value of $1000, a market price of $1068, and a 7 percent coupon. these bonds mature in 6 years and pay interest semiannually. The tax rate is 35 percent. The firm considering expanding by building a new auperstore. The super store will require an initial investment of $12.3 million and is expected to produce cash inflows of $1.1 million annually over its 10-year life. The risk associated with the super store are comparable to the risks of the project. At the end of the 10 years the firm expects to sell the super store for $6.7 million. Should the firm accept or reject the super store project and why. A. accept the project NPV is $1.27 million B. accept the NPV is $4.89 million C. reject the NPV is $1.06 million D. reject the NPV -$3.27 million E. reject the NPV is -$5.71 million those are my choicesExplanation / Answer
Common Stock................21,000 * 68 = 1,428,000
Debt...............................................534,000
Value............................................1,962,000
N = 6*2 = 12
PV = -1,068
PMT = 35
FV = 1,000
Solve for I, it will give you 2.824
But, that I is semi-annual, so you have to times by 2.
Actual I = 2.824 * 2 = 5.648
WACC = ($1,428,000/$1,962,000)(0.132) + ($534,000/$1,962,000)(0.05648)(1 - .35) = 0.106065
NPV = -$12.3m + $1.1m(PVIFA10, 10.6065%) + $6.7m/(1.106065)10 = -$3.27 million
The project should be rejected because the NPV is negative at the firm's cost of capital of 10.6065 percent.
D. reject the NPV -$3.27 million................(answer)