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CleanSweep has 2 million shares of common stock outstanding at a book value of $2 per share. The stock trades for

$4.00 per share. It also has $2 million in face value of debt that trades at 85% of par. Show all equations used for each part.

Part A: What is the market value of the firms equity, debt and the firm?

Part B: CleanSweep's CEO, Bill O'Brien, is curious to know what the firm's cost of capital is. Bill thinks the firm's cost of equity is 19%. According to CAPM estimates, the firm's beta is 1.5, the risk-free interest rate is 4% and the expected return on the market portfolio is 10%? The firm's debt is currently yielding 5% and it's tax rate is 30%. What is CleanSweep's WACC? (If you were unable to calculate Part A, use an equal 50%/50% debt to equity ratio (-1 point)).

Part C: Bill O'Brien is planning a new capital project. He expects the project to have the same level of risk as the company overall. The project will cost $9M and will return annual cashflows of $1M forever. Should Bill O'Brien go ahead with this project? What is the projected NPV?

Top Answer

Part A: The market value of the firms equity= $8 million The market value of the firms debt = $1.7 million The... View the full answer

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