Assets Liabilities & Equity Cash 250 Long-Term Debt 6,423 Accounts Rec. 850 Equi
ID: 2630992 • Letter: A
Question
Assets
Liabilities & Equity
Cash
250
Long-Term Debt
6,423
Accounts Rec.
850
Equity
1,387
Inventories
2,277
Net Fixed Assets
4,433
Total Assets
7,810
Total Liab. & Equity
7,810
Year
0
1
2
3
4
5
Project A
$-1,750
854
450
350
675
812
PV
NPV
Project B
$-4,275
1,685
967
735
920
512
PV
NPV
Assets
Liabilities & Equity
Cash
250
Long-Term Debt
6,423
Accounts Rec.
850
Equity
1,387
Inventories
2,277
Net Fixed Assets
4,433
Total Assets
7,810
Total Liab. & Equity
7,810
Explanation / Answer
Calculate the WACC for ABC Company.
Step 1:
1) Cost of Common Stock = Rf + (Rm-Rf)*Beta
Cost of Common Stock = 3.5 + (11.5-3.5)*1.45
Cost of Common Stock = 15.1%
After Tax Cost of Debt = 7*(1-30%)
After Tax Cost of Debt = 4.9%
Step 2:
Weight of Common Stock = 1387/7810
Weight of Debt = 6423/7810
Step3:
WACC = Weight of Common Stock* Cost of Common Stock + Weight of Debt* After Tax cost of Debt
WACC = 1387/7810*15.1 + 6423/7810 * 4.9
WACC = 6.71%
Calculate the NPV for Project A and B using the WACC from part a.
Which project, if any, should ABC Company accept?
Answer
Project A should ABC Company accept
Why?
Answer
Project A should ABC Company accept because Project A has Positive NPV and hence project A is viable
Year 0 1 2 3 4 5 Project A ($1,750) 854 450 350 675 812 PV (1,750.00) 800.30 395.19 288.04 520.57 586.85 NPV 840.95 Project B ($4,275) 1,685 967 735 920 512 PV (4,275.00) 1,579.05 849.21 604.88 709.52 370.04 NPV (162.30)Related Questions
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