Bobcat Inc. provides you with the following information about firm's cost of capital.
Tax rate = 24%.
12-year, 6% coupon, quarterly payment non-callable bonds sell for $980. New bonds will be
privately placed with no flotation cost with $1,000 par value.
Perpetual preferred stock sells for $105 with 4.5% annual dividend on the par value, $100 par value,
The firm plans to issue new common stock with the flotation cost of 7%. Common stock currently
sells for $240. $D_0$ = $5 and g=3%.
Target capital structure: 40% debt, 10% preferred, 50% common equity.
Assume that Bobcat Inc. is considering project S with the following cash flows. Use WACC from the first
part to complete your capital budgeting analysis.
Year
0
1
2
3
Cash flows
-100,000
-10,000
30,000
120,000
Bobcat Inc. only accepts a project with less than 2 years of payback.
Questions
1. Find WACC (15 points)
2. Find NPV, IRR, MIRR, Payback Period, Discounted Payback Period (15 points)
3. Should Bobcat Inc. invest in project S based on the capital budgeting criteria for NPV, IRR, MIRR,
Payback Period, and Discounted Payback period? Why? Please make sure to explain the decision
criteria for each method as part of your answer. (5 points)
