A firm is considering a $5000 project that will generate an annual cashflow of $1000 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% What is the project’s NPV? After tax cost of debt = 6.03 Wd= 50% We = 50% WACC = 0.5(0.0603) + 0.5(0.15) = 10.5% CFo= -5000 CFj = 1000 I am getting NPV 239 but its different from what Schweser is giving!!
Your breakdown of debt/equity is incorrect. It should be debt 33.33% and equity 66.67%, so WACC comes out to 12%.
A debt to equity ratio means 2 to 1 not 1-1 like you are doing. Examplie 1/2 equals at .5 ratio.
Suddenly it hits me!!! Thanx a lot, i hate this
D/E = [1/(1+d/e)] = 1/1.5 = .67 DEBT… 1-.67 = .33 EQUITY
should it not be 11% 15/3+9*2/3=11% NPV 336? Did I goof up somewhre? -5k=pv; 1k=pmt; fv for 8yrs@11% = -336
OV25, you need multiply the debt by 1-tax rate and the by it weighting of 33.33%.
Aha… thanks aarguello… so k=9.3? NPV 473.6? 5*.66+6=9.3%
what’s the NPV? -34?
dude, ke is 10 and kd is 2.01. according to my calc. which makes a wacc of 12.01.
urihgt. …man!.. 1.8+10=11.8; 2.54 npv?
okay here’s how i got wacc. d/e = 0.5 d=0.5e Total Capital = d + e = 0.5e + e = 1.5e therefore, e=1/1.5=~67% ke = 0.667*15 =10% since E=67%, D=33% kd = 0.333*9*0.67 =2.01% WACC= 10+2.01=12.01 plug it in, and NPV= -34. What’s the answer?