Finance Corporate Question 24

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 =