Corporate Finance Case Study

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Solutions Manual

Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:
IRRNX-20 = 20.34%
The IRR criteria implies accepting the NX-20.
c.

The profitability index is the present value of all subsequent cash flows, divided by the initial investment, so the profitability index of each project is:
PINP-30 = ($185,000{[1 – (1/1.15)5 ] / .15 }) / $550,000
PINP-30 = 1.128
PINX-20 = [$100,000 / 1.15 + $110,000 / 1.152 + $121,000 / 1.153 + $133,100 / 1.154
+ $146,410 / 1.155] / $350,000
PINX-20 = 1.139
The PI criteria implies accepting the
…show more content…
The NPV is:
NPV = –$53,386,912 + ($6,700,000/.1123)
NPV = $6,251,949

23. We can use the debt-equity ratio to calculate the weights of equity and debt. The weight of debt in the capital structure is:
XB = .85 / 1.85 = .4595, or 45.95%
And the weight of equity is:

XS = 1 – .4595 = .5405, or 54.05%
Now we can calculate the weighted average flotation costs for the various percentages of internally raised equity. To find the portion of equity flotation costs, we can multiply the equity costs by the percentage of equity raised externally, which is one minus the percentage raised internally. So, if the company raises all equity externally, the flotation costs are:

fT = (0.5405)(.08)(1 – 0) + (0.4595)(.035) fT = .0593, or 5.93%
The initial cash outflow for the project needs to be adjusted for the flotation costs. To account for the flotation costs:
Amount raised(1 – .0593) = $145,000,000
Amount raised = $145,000,000/(1 – .0593)
Amount raised = $154,144,519
If the company uses 60 percent internally generated equity, the flotation cost is:

fT = (0.5405)(.08)(1 – 0.60) +

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