12 6 Assume that the corporation raises half a billion dolla

12- 6. Assume that the corporation raises half a billion dollars to undertake new projects. This amount is raised completely through new common stock at the rate of 15 percent expected return including floatation costs. How is this likely to alter the WACC? What is the new WACC? (10 points) Answer questions 7, 8, 9. 10, 11, 12 and 13 based on following capital budgeting projects with 10 percent cost of capital Project G Project PProject y $(20,ooo) 7,000 7,000 7,200 7.300 (7,000) 77,000 7. Caleulate the NPV for each of the projects. Which one project would you choose if they are all mutually exclusive? (4 points) ?000 NPV V CIHlO) 8. Calculate the IR foreach of the projecets. Which one project would you choose ifthey are all mutually exclusive? (4 points) IRR G 33 IRR P TRR V Decision 5785:12 51,572 03 9. Calculate the MIRR for each of the projects. Would this change your decision regarding choosing one project as compared to your choice based on IRR. (8 points) MIRR G

Solution

6. Total Value of firm = DEBT +EQUITY + PREFERRED STOCK =
1. Debt = Assets - Equity = 2 -1 =1 billion
Preferred stock = Equity - common stock = 1-0.2 = 0.8 billion
Total Value of firm = DEBT +EQUITY + PREFERRED STOCK = 1 + 0.8 + 0.2 = 2 billion
Cost of equity 15% will increase the value of WACC.

WACC = Weight of equity * new cost of equity + Weight of preferred stock * Cost of preferred stock + Weight of debt * cost of debt * ( 1-tax rate)
(0.8/2)* 15% + (0.2/2)* 10% + ( 1/2) * 10% * ( 1-40%) = 10.0%

7. NPV of G = -20,000 + 7000/(1+10%) + 7000/(1+10%)² + 7200/(1+10%)³ + 7300/(1+10%)⁴ = 2544.23
NPV of P = -50,000 + 77000/(1+10%)⁴ = 2592.04
NPV of V = -30,000 - 7000/(1+10%) + 75000/(1+10%)⁴ = 14,862.37

NPV of V is highest .Hence V is selected

IRR of G = -20,000 + 7000/(1+IRR%) + 7000/(1+IRR%)² + 7200/(1+IRR%)³ + 7300/(1+IRR%)⁴ = 0
Hence IRR = 15.70%
IRR of P = -50,000 + 77000/(1+IRR%)⁴ = 0, Hence IRR = 11.40%
IRR of V = -30,000 - 7000/(1+ IRR) +  75000/(1+IRR)⁴ = 0 ,.Hence IRR = 20.29%

IRR of V is highest .Hence V will be selected

9. MIRR = (FV of Cash indflows/PV of Cash Outflows)^1/n -1
MIRR of G = [(7000* ( 1+10%)³ + 7000* ( 1+r10%)² ₊ 7200* ( 1+10%)¹ + 7300)/20000]^1/4 -1 =13.34
MIRR of P = (77000/50000)^1/4 -1 = 11.40%
MIRR of V = (75000/[30000+7000/1.1])^1/4 -1 = 19.84%

On basis of MIRR V should be selected .

Best of Luck. God Bless