Answer Happy

You have been assigned analysis of a project that has a total of
$500,000 in Net Investment. You
have decided that you will start by issuing shares of common stock
at a price of $60 per share.
The current risk-free rate is 3%, and the expected return on the
market is 12%.
For the remainder, you plan to either borrow it via a bank loan or
via the coupon bond market.
The bank loan would carry an interest rate of 5%, while the coupon
bonds would carry a rate of
8%. However, you can only borrow $200,000 of bank debt, while you
could borrow $400,000 of
coupon bonds. Further ... if you borrow $200,000 of bank debt, the
beta on the common stock
you would issue for the remainder would be 1.2. If you borrow
$400,000 of coupon bonds, the
beta would increase to 1.6. The tax rate is 21%
a. Which option is the better of the two below... show by
calculating the respective WACC: (15
pts)
Option A: $200,000 of Bank Debt; $300,000 of common stock: WACC =
_________
Option B: $400,000 of Coupon Bond Debt; $100,000 of common stock:
WACC = _________
b. The project has expected NCFs of $50,000 during each of the 20
years of life. Given this,
and using the better of the two financing options from (a), what is
the NPV of the project?
(15 pts)