Expert answer:cost capitol

Answer & Explanation:Chapter 9 Mini Case: Cost of Capital and Project Risk Read the mini-case in Chapter 9 of your text andCalculate the current weighted average cost of capital for CWC.Calculate the appropriate discount rate for the healthy bottled water project.Perform a sensitivity analysis for sales price, variable costs, fixed costs, and unit sales at +/- 10%, 20%, and 30% from the base case. Perform an analysis of the following two scenarios:Best case: Selling 2,500,000 units at a price of $1.24 each, with variable production costs of $0.22 per unit.Worst case: Selling 950,000 units at a price of $1.32 per unit, with variable production costs of $0.27 per unit.Explain if the firm should undertake the healthy bottled water project. Remember to show all your work on any calculation.ch. 9.docx
ch._9.docx

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Mini-Case: Cost of Capital and Project Risk
Cascade Water Company (CWC) currently has 30,000,000 shares of common stock outstanding that
trade at a price of $42 per share. CWC also has 500,000 bonds outstanding
that currently trade at $923.38 each. CWC has no preferred stock outstanding and has
an equity beta of 2.639. The risk-free rate is 3.5%, and the market is expected to return
12.52%. The firm’s bonds have a 20-year life, a $1,000 par value, a 10% coupon rate and pay
interest semi-annually.
CWC is considering adding to its product mix a “healthy” bottled water geared toward
children. The initial outlay for the project is expected to be $3,000,000, which will be
depreciated using the straight-line method to a zero salvage value, and sales are expected
to be 1,250,000 units per year at a price of $1.25 per unit. Variable costs are estimated to be
$0.24 per unit, and fixed costs of the project are estimated at $200,000 per year. Th e project
is expected to have a 3-year life and a terminal value (excluding the operating cash flows
in year 3) of $500,000. CWC has a 34% marginal tax rate. For the purposes of this project,
working capital effects will be ignored. Bottled water targeted at children is expected to
have different risk characteristics from the firm’s current products. Therefore, CWC has
decided to use the “pure play” approach to evaluate this project. After researching the
market, CWC managed to find two pure-play firms. The specifics for those two firms are:
Firm
Equity Beta
D/E Tax
Rate
Fruity Water
1.72
0.43
34%
Ladybug Drinks
1.84
0.35
36%
1. Determine the current weighted average cost of capital for CWC.
2. Determine the appropriate discount rate for the healthy bottled water project.
3. Should the firm undertake the healthy bottled water project? As part of your
analysis, include a sensitivity analysis for sales price, variable costs, fixed costs, and unit sales at ±10%,
20%, and 30% from the base case. Also perform an analysis of the following two scenarios:
a. Best case: Selling 2,500,000 units at a price of $1.24 each, with variable production costs of $0.22 per
unit.
b. Worst case: Selling 950,000 units at a price of $1.32 per unit, with variable
production costs of $0.27 per unit.
Graham, John; Smart, Scott B.; Megginson, William L (2009-09-28). Corporate Finance: Linking Theory to
What Companies Do (Available Titles CourseMate) (Page 350). Cengage Textbook. Kindle Edition.
Graham, John; Smart, Scott B.; Megginson, William L (2009-09-28). Corporate Finance: Linking Theory to
What Companies Do (Available Titles CourseMate) (Page 349). Cengage Textbook. Kindle Edition.
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