Question 26 1 pt Jake the Dog Inc. is investing in a new portable iguana killing

Question

Question 26 1 pt Jake the Dog Inc. is investing in a new portable iguana killing machine that will cost $200,000. The machine has a useful life of 6 years and falls into the 5-year property class for the depreciation purposes. The IRS MACRS schedule for the six years is: (1) 20%, (2) 32%, (3) 19.2%, (4) 115296, (5) 11.52%, (6) 5.76%. It will generate $50,000 per year of savings for Jake and can be sold for $50,000 at the end of the 6-year period. Jake's corporate tax rate is 34%. In addition, Jake has 2000 outstanding 9% annual coupon bonds with a $1000 par value, 20 years to maturity and a price of $1085. Jake also has 60,000 shares of common stock outstanding that is selling for $45 per share. This stock has a beta of 2.45 (its Jake! he is a risky dog-dude!!), the expected market return is 12% and the risk-free rate is 5%. Finally, Jake has 36,000 shares preferred stock outstanding that pays a 5.5% dividend and sells for $40 per share. Using the WACC and the OCF's what is the NPV of Jake's iguana killing project (do not forget about the sale of the machine at the end)? O $30.546 O-$28.768 -$11.430 O-$45.987 ?-29.784

Explanation / Answer

Answer: - $ 11,430

Computation of WACC :

Computation of NPV:

Source of Capital Market Values Weights Specific Costs of Capital Weighted Costs of Capital Bonds $ 2,170,000 0.3439 0.0538 0.0185 Common Stock 2,700,000 0.4279 0.2215 0.0948 Preferred Stock 1,440,000 0.2282 0.1375 0.0314 $ 6,310,000 1.0000 0.1447

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