THANK YOU! Blue Angel, Inc., a private firm in the holiday gift industry, is con
ID: 2648898 • Letter: T
Question
THANK YOU!
Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .40, but the industry target debt-equity ratio is .35. The industry average beta is 1.2. The market risk premium is 7 percent, and the risk-free rate is 5 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 40 percent. The project requires an initial outlay of $675,000 and is expected to result in a $95.000 cash inflow at the end of the first year. The project will be financed at Blue Angel's target debt-equity ratio. Annual cash flows from the project will grow at a constant rate of 5 percent until the end of the fifth year and remain constant forever thereafter. Calculate the NPV of the project. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))Explanation / Answer
Calulation of NPV Year Amount PVF (10.696%) PV Initial invetsment 0 -675000 1 $ (675,000.00) Annula cash flows NPV (Sum of PVs) $ (675,000.00) Calculation of WACC (Discount rate ) Cost of Debt = 5%(1-0.40) = 3% Cost of equity = RF + Beta * MRP RF = Risk free rate = 5% Beta = Avergae beta =1.2 MPR = Market risk premium =7% Cost of equity = 5% + 1.2 * 7% = 13.40% WACC = Cost of Equity * weight of equity + Cost of debt * weight of debt = (13.40*0.74 )+ (3 *0.26) 10.696 %
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.