The companys bonds have a par value if 1000 and are currently priced ar 857.22 p
ID: 2804282 • Letter: T
Question
The companys bonds have a par value if 1000 and are currently priced ar 857.22 per 6% of bond, paying interest annually and maturing in 11 years. the companys stock has a beta of 1.20, the return on the market is 15% and the risk free rate is 2%. the company has no preffered stock outstanding, nor any foresseable intention of issuing preffered stock. its long term targeted debt/equity ratio is .60 the company marginal tax rate is 40%
Lani wants you to evaluate the purchase of a new equipment for 333,000 with shipping and installation addingg 15,000 to the capital cost. the new equipment will be depricated over 5 years on a straight line method it is expected that it can be sold for 30,000 at the end of 5 years.
What is the ner salvage value of the new equipment?
Net Operating cash flow?
NPV?
Explanation / Answer
For NPV we need to calculatw the WACC
Yield to maturity = 8%
After tax cost of debt = 8%*(1-40%)
= 4.8%
Cost of equity = 0.02+1.2* (0.15-0.02)
= 17.6%
Now, using 9.92% as the cost of capital, NPV is calculated.
salvage value $30,000 Book value $0 profit on sale $30,000 Tax on profits $12,000 After tax salvage value $18,000