Cargo Corporation is a major producer of lawn care products. Cargo stock currently sells for RM80 per share; there are 1

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Cargo Corporation is a major producer of lawn care products.
Cargo stock currently sells for RM80 per share; there are 10.5
million shares outstanding. Cargo also has debt outstanding with an
aggregate book value of RM400 million. The bonds issued by Cargo
are currently yielding 10% and are trading at 90% of face value.
The risk-free rate if 8%, the market risk premium is 9%, and Cargo
has a beta equal to 2. The corporate tax rate is 34%.
(a) Cargo is considering expansion of its facilities. Use the
SML approach to determine the cost of equity capital for Cargo. (2
Marks)
(b) Compute the weighted average cost of capital for Cargo. (10
marks)
(c) The project under consideration requires an outlay of
RM1,000,000. The expansion will produce incremental after-tax cash
inflows of RM350,000 per year for the next five years. Compute the
net present value of the investment, assuming the project has the
same risk as Cargo’s other projects. (5 marks)
(d) Flotation costs are 5% of the amount of common stock issued
and 2% of the amount of debt issued. Using the same data, compute
the weighted average flotation cost for Cargo. Then, compute the
net present value of the investment when flotation costs are
considered to determine whether they should undertake the project.
(8 marks)