Martin Mining has the following information regarding its debt and equity.
|
Beta |
1.25 |
|
Expected Return on Market |
13.75% |
|
Treasury Bond Rate |
2.3% |
|
Flotation Cost of Equity |
3% |
|
Book Value of Debt |
$3,000,000,000 |
|
Market Value of Debt |
$3,500,000,000 |
|
Book Value of Equity |
$5,500,000,000 |
|
Market Value of Equity |
$4,250,000,000 |
|
Bond Information |
Coupon rate = 6%, maturity = 20 years, maturity value =$1,000 and the current price is 982.25. Assume interest is paid semiannually. |
a. Find the weighted average cost of capital. Assume the tax rate is 25%.
b. Martin Mining is considering a new investment that will last for six years. The project has projected sales of $2,557,000. Variable costs are 62 percent of sales and fixed costs are $90,000; depreciation $191,000 per year. Prepare a pro forma income statement assuming a tax rate of 25 percent. Assume the project costs $1,500,000. What is projected net income? What is operating cash flow?
c. Now assume that Martin Mining is planning to evaluate the project in problem (2) using the information on the cost of capital from problem (1). In addition to the previous information, assume that Martin will need to invest $800,000 in net working capital and that it will be recovered at the end of the project. Evaluate the project using NPV and IRR.
d. Assume 1 euro = $1.25 in the 180-day forward market and the 180-day risk-free rate is 9% in the U.S. and 6% in France. Does interest rate parity hold?
Spot rate = $1.23.
