2. You are in charge of obtaining $250,000 worth of funding for a new project your company is considering. You can issue common equity in any of the following amounts: • Option 1: 3000 shares at $60 per share • Option 2: 2000 shares at $70 per share • Option 3: 1500 shares at $80 per share In any case, you will finance the rest with private debt. The cost of the private debt is a function of the amount that you borrow. You are assured in any of the scenarios of borrowing at least $70,000, and at that level, you will have a cost of debt of 6%. For every $10,000 additional debt beyond that, the cost increases by .5%. The cost of the common stock 9.1% if you borrow $70,000 (i.e., Option 1), but increases by 1% for Option 2, and another 1% for Option 3. The company’s tax rate is 35%.
a. Given this, which of the options above provides the best scenario? (15 pts) WACC: Option 1 WACC: Option 2 WACC: Option 3
b. Suppose the project is expected to generate NCFs of $75,000 during the first four years and then $50,000 for the fifth and final year. Given this, what is that Net Present Value of the project?
