The Weighted Average Cost of Capital (WACC)

Cost of Equity = D0*(1+g)/P0 + g

Cost of Equity = 2*(1+3%)/30 + 3% 

Cost of Equity = 9.87% 

Cost of Debt = rate(nper,pmt,pv,fv)*2 

nper = 7*2 = 14 

pmt = 6.5%*1000*1/2 = 32.50 

pv = -950 

fv = 1000 

Cost of Debt = rate(14,32.50,-950,1000)*2 

Cost of Debt = 7.43% 

Cost of Preferred Stock = D/P0 

Cost of Preferred Stock = 5/60 

Cost of Preferred Stock = 8.33% 

After Tax Cost of Debt = Cost of Debt*(1-tax rate) 

After Tax Cost of Debt = 7.43%*(1-38%) 

After Tax Cost of Debt = 4.61% 

Market Value of Equity = 400000*30 

Market Value of Equity = 12,000,000 

Market Value of Equity = $ 12 million

Question 1 

Firm's Weighted Average Cost of Capital (WACC) = Weight of Equity * Cost of Equity + Weight of Debt * After Tax Cost of Debt + Weight of Preferred Stock * Cost of Preferred Stock 

Firm's Weighted Average Cost of Capital (WACC) = 12/(12+3+2) *9.87% + 3/(12+3+2)*4.61% + 2/(12+3+2)*8.33% 

Firm's Weighted Average Cost of Capital (WACC) = 8.76%Firm's Weighted Average Cost of Capital (WACC) = 8.76% 

Question 2 

Firm's Operating Cash Flow (OCF) = (Sale- Expenses)*(1-tax rate) + Annual Depreciation* Tax rate

Firm's Operating Cash Flow (OCF) = (3500000-1200000)*(1-38%) + 5500000/10*38%

Firm's Operating Cash Flow (OCF) = $ 1,635,000

Question 3 

NPV = -Initial Investment + PV of Annual OCF

NPV = -5500000 + 1635000*(1-(1+8.76%)^-10)/8.76%

NPV = 5,104,632

Question 4 

I would accept the project since its NPV is positive hence the project is viable