Finance Corporate Question 24

Pages: 1 (260 words) Published: December 13, 2012
24. We can use the debt-equity ratio to calculate the weights of equity and debt. The debt of the company has a weight for long-term debt and a weight for accounts payable. We can use the weight given for accounts payable to calculate the weight of accounts payable and the weight of long-term debt. The weight of each will be: Accounts payable weight = .15/1.15 = .13 Long-term debt weight = 1/1.15 = .87 Since the accounts payable has the same cost as the overall WACC, we can write the equation for the WACC as: WACC = (1/1.8)(.14) + (0.8/1.8)[(.15/1.15)WACC + (1/1.15)(.08)(1 – .35)] Solving for WACC, we find: WACC = .0778 + .4444[(.15/1.15)WACC + .0452] WACC = .0778 + (.05797)WACC + .0201 (.9420)WACC = .0979 WACC = .1039, or 10.39%

We will use basically the same equation to calculate the weighted average flotation cost, except we will use the flotation cost for each form of financing. Doing so, we get: Flotation costs = (1/1.8)(.08) + (0.8/1.8)[(.15/1.15)(0) + (1/1.15)(.04)] = .0599, or 5.99% The total amount we need to raise to fund the new equipment will be: Amount raised cost = \$50,000,000/(1 – .0599) Amount raised = \$53,186,023 Since the cash flows go to perpetuity, we can calculate the present value using the equation for the PV of a perpetuity. The NPV is: NPV = –\$53,186,023 + (\$6,200,000/.1039) NPV = \$6,488,212