prob easy and stupid question and maybe cuz its getting late for me and iv been studying all day… but some reason cant figure out the simple math for calc the weights on debt and equity thanks for the help A company is considering a $10,000 project that will last 5 years. * Annual after tax cash flows are expected to be $3,000 * Target debt/equity ratio is 0.4 * Cost of equity is 12% * Cost of debt is 6% * Tax rate 34% What is the project’s net present value (NPV)? A) +$1,460. B) -1,460. C) +1,245 Click for Answer and Explanation First, calculate the weights for debt and equity wd + we = 1 we = 1 − wd wd / we = 0.40 wd = 0.40 × (1 − wd) wd = 0.40 − 0.40wd 1.40wd = 0.40 wd = 0.286, we = 0.714
another… A firm is considering a $5,000 project that will generate an annual cash flow of $1,000 for the next 8 years. The firm has the following financial data: * Debt/equity ratio is 50%. * Cost of equity capital is 15%. * Cost of new debt is 9%. * Tax rate is 33%. Determine the project’s net present value (NPV) and whether or not to accept it. NPV Accept / Reject A) -$33 Reject B) +$33 Accept C) +$4,968 Accept Click for Answer and Explanation First, calculate the weights for debt and equity d + we = 1 d = 0.50We e + We = 1 d = 0.333, we = 0.667
hi, 1- a) the outflow is 10000 so it will be -10000 at the start b) this is important to understand… target D\E is 0.4 which means means that in target Capital structure Debt will be 0.4 if equity is 1 so total it, the total capital will be 1.4 debt’s portion will be 0.4/1.4 and equity’s portion will be 1/1.4 now calculate Kd= 6% (1-.34)= 3.96 Ke= 12 WACC= 3.96* (0.4/1.4) + (12 (1/1.4)=9.702 app discounting project with it we get 1459.46 so A is my answer
you can solve the 2nd question with same mathod. Just remember that when you have the D/E ratio rather than target composition, you can calculate the target composition out of D/E ratio
thanks man
no problem pleasure’z mine