Weighted Average Cost of Capital Assignment | Homework For You

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Bob’s is a retail chain of specialty hardware stores. The firm has 21,000 shares of stock outstanding that are currently valued at $63 a share. Firm’s Beta is 1.2. The risk-free rate is 1% and the expected market risk premium is 6.6%. Firm expects to pay an annual dividend of $3 in one year. Dividend is expected to grow indefinitely at 5% annually. The firm also has 500 coupon bonds outstanding that have a face value of $1,000, a market price of $1,168, mature in 6 years and have a YTM of 5.648%. The tax rate is 35%. Homework For You

Part 1

What is the company’s weighted average cost of capital if CAPM is right method for cost of equity?

Part 2 The firm is considering expanding by building a new superstore. The risks associated with the superstore are comparable to the risks of the firm’s current operations.The superstore will require an initial investment of $12.3 million and is expected to produce cash inflows of $1.3 million annually over its 10-year life. The initial investment will be depreciated on a straight line basis over the life of the project. At the end of the 10 years, the firm expects to sell the superstore for $6.7 million. What is the NPV of superstore project? Should the firm accept or reject the project? Get Finance homework help today

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