24 Jul WHAT IS THE WEIGHTED AVERAGE COST OF CAPITAL FOR THE FIRM?
When you start Show more You just landed a job as the chief financial officer at Social Network Incorporated. When you start working you first look closer at the financial statements of the firm. You see that the company is fully equity financed. You also notice that assets have a value of $40000000 and that the asset beta is 0.6. The firms stock had a return of 12% last year but you do not expect this to continue. This can be compared to a 9% market return (which in contrast you expect to continue) and risk free rate of 2%. Corporate taxes are 30%. You are asked to calculate whether starting a new project called Facebook will be a good idea. This is a social networking project just like most other projects that your firm engages in. The start-up costs of the project is $1000000 and the marketing team esti- mates that it can be a success for at least 15 years after which the firm will stop the pro- ject. The initial investment in the project is to be depreciated to a salvage value of $250000 but actually you expect to be able to sell the project to Google for only $150000 in 15 years time. It is estimated that this new project will generate an annual income of $75000 while operating costs will be $15000 per year. The project also re- quires an increase in working capital mainly IT interns of $80000 which is freed up again at the end of the project. a) What is the weighted average cost of capital for the firm? Show less
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