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McCann Catching, Inc
McCann Catching, Inc. has 3.00 million shares of stock outstanding. The stock currently sells for $12.87 per share. The firm’s debt is publicly traded and was recently quoted at 89.00% of face value. It has a total face value of $12.00 million, and it is currently priced to yield 10.00%. The risk free rate is 4.00% and the market risk premium is 8.00%. You’ve estimated that the firm has a beta of 1.09. The corporate tax rate is 35.00%. The firm is considering a $44.06 million expansion of their production facility. The project has the same risk as the firm overall and will earn $12.00 million per year for 6.00 years. What is the NPV of the expansion? (answer in terms of millions, so 1,000,000 would be 1.0000)
Expert Solution
| MV of equity=Price of equity*number of shares outstanding |
| MV of equity=12.87*3000000 |
| =38610000 |
| MV of Bond=Par value*bonds outstanding*%age of par |
| MV of Bond=1000*12000*0.89 |
| =10680000 |
| MV of firm = MV of Equity + MV of Bond |
| =38610000+10680000 |
| =49290000 |
| Weight of equity = MV of Equity/MV of firm |
| Weight of equity = 38610000/49290000 |
| W(E)=0.7833 |
| Weight of debt = MV of Bond/MV of firm |
| Weight of debt = 10680000/49290000 |
| W(D)=0.2167 |
| Cost of equity |
| As per CAPM |
| Cost of equity = risk-free rate + beta * (Market risk premium) |
| Cost of equity% = 4 + 1.09 * (8) |
| Cost of equity% = 12.72 |
| After tax cost of debt = cost of debt*(1-tax rate) |
| After tax cost of debt = 10*(1-0.35) |
| = 6.5 |
| WACC=after tax cost of debt*W(D)+cost of equity*W(E) |
| WACC=6.5*0.2167+12.72*0.7833 |
| WACC =11.37% |
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