Question

Ramblin Wreck is a firm specializing in engineering components. The firm is publicly traded and is considering the following project: The project will last 5.00 years with an annual cash flow of $40.00 million. The project will require an initial investment of $140.00 million The firm must determine the cost of capital to evaluate the project. (The project is within the firm’s normal activities) Ramblin Wreck, Inc. Financial Data:

STOCK DATA: BOND DATA:

Current Price Per Share $28.00 Current Price Per Bond $922.00

# of Shares 2.00 million # of bonds 20,000.00

Book Value $50 million Annual Coupon Rate 8.00%

Face Value Per Bond $1,000

Maturity 10 years

The risk free rate in the economy is currently 2.00%, while investors have a market risk premium of 6.00%. Ramblin Wreck, Inc. has a beta of 1.41. The tax rate is 38.00%. What is the NPV of the project? (express in millions, so 1000000 would be 1.00)

Answer 1

First thing to do for evaluating the project, is finding out it's NPV,

• Find out Cost of Equity and Debt
• Find out WACC
• Find Cashflows
• Find Discounted Cashflows
• NPV

1.Cost of Equity

K_e= Risk free Rate + (Beta x Market Premium)

= 2% + (1.41 * 6%) = 10.46%

K_e = 10.46%

2.Cost of Debt

K_d= Yield ( 1 - tax rate)

Yield of bond with CMP = $922, Coupon = 8%, Face Value = $1000, Maturity = 10 years

is 9.2276%

K_d = 9.2276%(0.62) = 5.7211%

K_d=5.72%

3.WACC (Market Value Weights are always preferred over Book Value Weights)

Particulars	Value	Weight	Rate	Weighted Rate
Debt	18.44	0.2477	5.76	1.4269
Equity	56	0.7522	10.46	7.8689
	74.44			9.2957

So, WACC is 9.29%

4. NPV @ 9.2957% is $14.4 Million

Good luck