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  • NPV Calculation

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    First and Ten Corporation is considering purchasing $58 million in equipment that would generate $19.1 million in annual unlevered cash flows for 5 years. The company's stock has a covariance with the market of 0.0506, the market's standard deviation is 23% and risk premium is 6.5%. It has $56.8 million in bonds at 6.8% yield and $33 share price with 6 million shares outstanding. Its debt-equity ratio and tax rate are 23% and it must calculate its cost of equity, cost of debt, weights of equity and debt, WACC, and NPV of the equipment purchase.

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    First and Ten Corporation is considering purchasing $58 million in equipment that would generate $19.1 million in annual unlevered cash flows for 5 years. The company's stock has a covariance with the market of 0.0506, the market's standard deviation is 23% and risk premium is 6.5%. It has $56.8 million in bonds at 6.8% yield and $33 share price with 6 million shares outstanding. Its debt-equity ratio and tax rate are 23% and it must calculate its cost of equity, cost of debt, weights of equity and debt, WACC, and NPV of the equipment purchase.

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    © All Rights Reserved
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    12 views3 pages

    NPV Calculation

    Uploaded by

    rajakosuri429
    First and Ten Corporation is considering purchasing $58 million in equipment that would generate $19.1 million in annual unlevered cash flows for 5 years. The company's stock has a covariance with the market of 0.0506, the market's standard deviation is 23% and risk premium is 6.5%. It has $56.8 million in bonds at 6.8% yield and $33 share price with 6 million shares outstanding. Its debt-equity ratio and tax rate are 23% and it must calculate its cost of equity, cost of debt, weights of equity and debt, WACC, and NPV of the equipment purchase.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 3

    First and Ten Corporation’s stock returns have a covariance with the market portfolio

    of .0506. The standard deviation of the returns on the market portfolio is 23 percent and the
    expected market risk premium is 6.5 percent. The company has bonds outstanding with a
    total market value of $56.8 million and a yield to maturity of 6.8 percent. The company also
    has 6 million shares of common stock outstanding, each selling for $33. The company’s CEO
    considers the firm’s current debt-equity ratio optimal. The corporate tax rate is 23 percent and
    Treasury bills currently yield 4.4 percent. The company is considering the purchase of
    additional equipment that would cost $58 million. The expected unlevered cash flows from
    the equipment are $19.1 million per year for 5 years. Purchasing the equipment will not
    change the risk level of the firm.

    Calculate the cost of equity as follows:

    Calculate the after-tax cost of debt as follows:


    Calculate the weights of common equity and debt as follows:

    Calculate the weighted average cost of capital (WACC) as follows:


    Calculate the net present value (NPV) as follows:

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