(Solved): Net capital spending is $1.7 million at the beginning. Net working capital of $5 million is required ...

Net capital spending is $1.7 million at the beginning. Net working capital of $5 million is required initially and will be recovered at the end of the project. There will be after-tax salvage value of $100,000 at the end of the project.

To help finance this project, the company will issue a 4-year bond which has a before-tax cost of 7.49%. The money collected is $9.5 million.

The tax rate is 25%. Beta of the company is 1.2. The risk-free rate is 2% while the market risk premium is 5%. The Company has 10 million common shares with a market price of $2 per share.

(a) Calculate the cost of equity of XYZ company using CAPM.

(b) Calculate the weighted average cost of capital (WACC) of XYZ company.

(c) Compute the cash flow from assets for the project for each year.

(d) Assume that the average WACC for the telecommunications industry is 10%.

(i) Should XYZ Company use its WACC computed from (b) or the average WACC for the

telecommunications industry to calculate the NPV of the project? Explain.

(ii) Using the appropriate WACC from part (i), calculate the NPV of the project and

justify whether XYZ Company should undertake the project.

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For Q3b, do include PV, PMT, N & FV when calculating the Yield to maturity (YTM) for cost of debt. State it clearly.