Topics Covered Include:

Weighted Average Cost of Capital

Valuation of Equity using the Capital Asset Pricing Model

Book Value of Debt

Capital Structure

Capital Budgeting Technique of Net Present Value

Time Value of Money (Discounting)

BACKGROUND OF THE PROBLEM:

The market situation:

The risk-free rate is 5

% and the market risk premium is 8

%.

The firmâ€™s corporate tax rate is 35

%.

The firm has a beta of 1.10.

Common Stock is listed on the balance sheet of this company at $25 million.

The Total Retained Earnings (meaning RE + Additions to Retained Earnings) is listed on the balance sheet as $50 million.

Long-term Debt consists of one outstanding bond issue with a face value of $75 million dollars, an 8 percent coupon rate and it sells for 93 percent of par.

A proposed project has expected cash inflows of year 1, $30,000; year 2, $40,000; year 3, $30,000 and year 4, $40,000.

There is no residual value at the end of year 4.

ANSWER THE FOLLOWING in 5-7 pages

What is the cost of equity using the CAPM?

What is the cost of debt using Book Valuation?

What is the capital structure of the organization using book values?

What is the weighted Average Cost of Capital (WACC)?

What is the Net Present Value of the proposed Project?

Should the company purchase this project using your computed data?

Explain.

What literature article supports Net Present Value over IRR or Payback?