FINA Companys assets are $750 million, financed through bank loans, bonds, preferred stocks, and common...
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FINA Companys assets are $750 million, financed through bank loans, bonds, preferred stocks, and common stocks. The amounts are as follows:
Bank loans: $ 100 million borrowed at 3%
Bonds: $280 million, paying 8% coupon with semi-annual payments, and maturity of 10 years. FINA sold its $1,000 par-value bonds for $970 and had to incur $20 flotation cost per bond.
Preferred Stocks: $120 million, paying $15 dividends per share. FINA sold its preferred shares for $220 and had to incur $20 per share flotation cost.
Common Stocks: $250 million, beta is 3.20, the risk-free rate is 5 percent, and the market rate is 10%.
FINA is considering a new project that will last for five years with the following after-tax cash flows:
Cost of the project: $700,000
Year
Cash flow
1
148,000
2
148,000
3
148,000
4
148,000
5
253,000
If FINA is subject to a 20% tax rate, what is the WACC for FINA?
The company uses WACC to compute the NPV. What is the NPV and IRR of the project? Should FINA accept the project according to IRR and NPV?
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