Your firm has an average-risk project under consideration. You choose to fund th

Question

Your firm has an average-risk project under consideration. You choose to fund the project in the same manner as the firm's existing capital structure. If the cost of debt is 9.50%, the cost of preferred stock is 10.00%, the cost of common stock is 12.00%, and the WACC adjusted for taxes is 11.50%, what is the IRR of the project, given the expected cash flows listed here? Use a financial calculator to determine your answer. Category T0 T1 T2 T3 Investment -$800,000 NWC -$50,000 $50,000 Operating Cash Flow $350,000 $350,000 $350,000 Salvage $20,000 Total Incremental Cash flow- $850,000 $350,000 $350,000 $420,000

Explanation / Answer

Listed below are steps of how to estimate your firm’s approximate cost of debt if your firm's bonds are not currently traded.

Steps:
1. You need to find out the rating of the bond of your company. You can find the rating from Moody’s, Standard and Poor or http://www.fitchibca.com/ (Click on Corporate Finance and then issuer list and look for long-term rating).
2. From bondsonline.com, (http://www.bondsonline.com/, click on Today’s Market and then Corporate Bond Spread and get the spreads between corporate yield (Your chosen public company) and Treasury yield.
3. Also get the 10-Year US Treasury bond yield from bondsonline.com.
4. Add the spread from (2) to the 10-Year US Treasury bond yield.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.