(Answered) 1 a business consulting firm ferguson and co has the

Finance

1. A business consulting firm, Ferguson and Co, has the following capital structure.

a. Calculate WACC for the company, assuming the capital structure is 30% debt/70% equity, tax rate = 40%, debt coupon rate = 5%, risk premium for equity
= 6%, dividend yield =4%, company beta = 1.2, government T-bond rate = 3%.

b. Using the discount rate calculated from the above, which project should the company invest in, if they can only invest in one of them? Please calculate the
NPV and IRR

Year 0 -100k -100k

Year 1 +35k +80k

Year 2 +35k +30k

Year 3 +35k +15k

Year 4 +35k +15k

Which project has a higher NPV? Which project has a higher IRR? Should the company always invest in the project with the highest NPV? Why and why not?

c. Often the discount rate used for NPV analysis is higher than the WACC. Now assuming that the discount rate is twice as much as WACC, which project should

the company invest in based on NPV/IRR analysis? Does it change the decision? Please explain.

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